Short Sale

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What Does “Short Sale” Mean In Real Estate?

A short sale occurs when a home is sold but the amount of the sale is not enough to cover what is owed on the seller’s mortgage loan, as well as closing costs, taxes and the commission owed to the real estate agent. In a short sale, the seller is not willing to make up the difference.

Oftentimes, a short sale is happening because the owners are behind on their mortgage payments and are heading down the trail to foreclosure. Other reasons for a short sale could be because the home was bought at the peak of the market and has decreased in value, the homeowners used a large amount of their home equity toward a refinance, the owners are being relocated or they are getting a divorce.

If you are interested in purchasing a short sale, you will need to ask the seller how much is still owed on their debt. Then you can figure out the additional costs associated with the short sale. Many lenders will have their own forms to help calculate these costs. The lender and the title company will have exact figures that will be due at closing. You will also be able to find out if there are any other inspections that should be completed.

When a seller decides that a short sale might be the best option, he or she will need to get the lender’s approval. Included in the approval request submission is the borrower’s W-2 forms from any employers, or if he or she is unemployed, a letter outlining the unemployment. It will also include bank statements, two years of tax returns and any other financial documents that show the amount of income and debt obligations. It is also a good idea to include a “hardship letter,” which explains the reasons why you are not able to pay the full amount of the loan.

What kind of impact does a short sale have on credit reports? It is not unheard of for the lender to ask the seller to sign a promissory note. It can be for all or part of the difference between the short sale amount and the amount still owed on the debt. Overall, short sales show as negative activity on credit reports and can therefore lower credit scores tremendously.

When looking to purchase a short sale property, it is important that you understand exactly what you are getting into and know that the process is a long one. Have your real estate agent walk you through each step of the short sale process. Good luck! You are in for a long trip down a possibly bumpy road.

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