By Griff Garwood, AOL Real Estate contributor
Whether you're in the market for a new home or considering selling your existing home, chances are you've heard of a short sale. Short sales are becoming increasingly common in parts of the country where home values have dropped substantially. Short sales can benefit those sellers facing the prospect of a foreclosure as well as buyers looking for a deal on their next place to live. However, short sales can also be tricky, so understanding how they work is essential.
What's a Short Sale Anyway?
In a short sale, a seller facing the threat of foreclosure enters into an agreement with their mortgage lender to accept a price for the property that's less than the amount they actually owe on it. The seller makes no profit on the sale but avoids many of the problems that would come from a foreclosure.
Possible Advantages
With a short sale, sellers avoid having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their credit score. In a short sale, the seller and the lender work together to determine the details of the agreement, but typically sellers who complete a short sale also avoid owing the balance of the loan.
The biggest advantage to buyers is clearly the prospect of moving into a new property at a great discount. Moreover, buyers may find that short sales have an benefit over foreclosures too, since unlike a foreclosure, there's not much of a risk that the buyer will need to take action to remove the seller from the property.
Of course, mortgage lenders can benefit as well. With a short sale, lenders don't have to worry about getting involved in a long foreclosure process. More than anything else, lenders want their money back, and they generally want to steer clear of taking responsibility for selling a home. So, a short sale can actually save them time and money.
Potential Pitfalls
Sellers considering a short sale must understand a few important things. First, not all lenders will offer to relieve the seller of the responsibility of paying off the balance of the loan. So, sellers should get a solid commitment from lenders that states this is part of the deal. Also, though the seller is avoiding a foreclosure, even a short sale may affect their credit score to some extent. So, sellers should discuss this issue with their lender to figure out how the process will be reported to the credit agencies.
Most importantly, not all sellers even qualify for entering into a short sale. For example, few lenders will even think about entering into a short sale agreement with sellers who have not yet missed multiple payments. So, if you're a seller thinking about a short sale, you'll want to talk to your lender about the options available. Buyers need to be wary too, since getting a deal on a short sale is not as easy as it may sound. In fact, there are some extra steps that buyers need to take when entering into a short sale, which can require doing some additional homework and assembling the right paperwork. For a guided tour of this process, see the ten steps to buying a short sale.
Of course, if you're a buyer considering entering into a short sale, it would be wise to consult a real estate professional who can answer your questions and help you navigate the process. This way, you can be better prepared to pull together all the appropriate information you need to complete the transaction and move into your new home.
For More Information: What Is a Short Sale on AOL Real Estate.
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