Ever heard of buying a short sale? Ever had someone try to explain the concept to you, only to leave you scratching your head as to what all those big words mean? In today’s post, we’ll be tackling the process of buying a short sale, starting from the short sale definition, then moving on to a brief outline of the process and also explaining the difference between a short sale and a foreclosure.
What does short sale mean?
The more complex definition of a short sale infers that this is a property sale, in which the money made by its owner, through selling it, is still not enough to buy back the interests that secured their mortgage in the first place. In many cases, short selling a property comes with an agreement between the borrower and the lender, to do away with any deficiency incurring from the short sale and the mortgage loan. This, however, is not mandatory, unless both parties involved (i.e. the debtor/property owner and lender/mortgage institution) agree to this. Current California laws are an exception to this. Once a short sale is approved in the Sunshine State, all mortgage deficiencies are erased. The California Code of Civil Procedure states that the same applies to first- and second-time mortgage holders.
Short sale vs foreclosure: How are they different?
Most online sources on short sales will tell you that they are, in many respects, similar to foreclosures. Indeed, both in a short sale, as well as in a foreclosure scenario, the owner of the home needs to be several months behind with their mortgage payments. However, this is where the similarities end and the (far more significant) differences commence.
Nowadays, a short sale is a method of avoiding foreclosures. In a foreclosure, the bank confiscates the home. Once they do this, they own it and are free to sell it for as much as they can. Banks can either sell foreclosed homes themselves or through a real estate agency. In the case of a short sale, however, the homeowner sells their property to the lender for less than the home’s actual market value. As far as the lender is concerned, this only helps them avoid going through all the trouble of selling the home themselves. However, the lender would still lose money, which means it’s up to them to decide whether or not they will make the owner pay the outstanding balance of the mortgage or not.
Is buying a short sale a good idea?
The housing bubble has radically changed the rules of the short sale game. The values for homes suddenly exploded, which saw many homeowners trying to sell homes at over-inflated prices. Selling a home with a mortgage of $200,000 for just as much money, or even for slightly less, is a problem, when the historic average value of that home stands at around $100,000.
That being said, homeowners who are considering a short sale as an alternative to foreclosures may benefit from Bank of America short sale programs. The bank even offers financial assistance (ranging from $2,500 to $30,000) to eligible sellers. The bank advises home owners to apply for their programs before receiving an offer. This way, home owners may take part in the Cooperative Short Sale Program, the Home Affordable Foreclosure Alternatives (HAFA), or the Federal Housing Administration Short Sale Program (for owners with loans insured by the FHA).