SHORT SALES-what they are and How they work

With property values dropping in many places, short sale has now become a common term in the mortgage business. The most intuitive way to remember what a short sale is — is by thinking that it is the sale of a house that is short on money owed on home loans. How does this happen? Well, there are a few different factors that can contribute to a short sale, but the biggest one is the low appraisal and drop in property values.

Let's say for example that a family buys a house 5 years ago for $100,000. After 5 years, they have paid $20,000 into the principal. They have $80,000 left on the mortgage. So, if they need to sell their house right now, the house must appraise for at least $80,000 in order for them to break even. However, with lowering property values, the house only appraises for $50,000. This family is now short $30,000 if they sell the house.

If the family decides to keep the house until the housing market gets better, it's highly likely in 5 to 10 years that the house will appraise back to its original values, and the family won't lose anything. However, if the father loses his job and they can no longer afford to keep the house, then they may well have to try the short sale option.

In a short sale situation, the bank agrees to accept less than what the homeowners owe on their mortgage but this compromise comes with contingencies. First, the bank must approve the short sale amount that the owners set, and this makes a short sale take much longer than a private sale. Secondly, the bank has to approve the house for a short sale to begin with, which means the homeowners must write a hardship letter explaining why they can't make the payments. They must include paystubs, bank statements, and proof of assets to show why they cannot afford the house. The bank will then decide whether it is less of a loss to do a complete foreclosure, or if a short sale is a better option.

The reasons for a short sale outlined in the hardship letter can include family emergencies, loss of employment, and many other critical factors that cause a loss of income. Regardless of the situation, the very general definition of a short sale is when the seller sells his house for less than what he owes on their mortgage. The situation is not ideal for either the homeowner or the bank, but it is often the only economical choice both parties have.

For homebuyers, this is good news. You can buy a house that is in great condition (as the owners have lived in it up until the time of the sale), and you can get it for significantly cheaper than what the house was worth when the original owners bought it. So, if you have time to wait for the third party approvals, short sales are definitely a steal.

For homeowners, however, short sales are often a last resort to avoid foreclosure, which is detrimental to your credit score. If you are at risk for a foreclosure, be sure to find out if you can be approved for a short sale instead.
Source: Trulia Home Voice


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