Understanding a short sale

Real Estate Agent with William Pitt Sotheby's International Realty REB 0757310

Q. What is a Short Sale?

A. A short sale occurs when a property is sold for less than what is owed to a lender and the seller is unable to pay the lender the difference between what is owed and the sales price.

Q. Can anyone do a short-sale?

A. No you can only do a short-sale if you can prove hardship and do not have the assets to make up the difference between the amount of the sales price and the debt.  Just because your home is "upside-down" or worth less than the current mortgage, does not make you eligible for a short-sale. 

Q. What happens with the amount that is not paid?

A. The lender has the right to place a deficiency judgement against the borrower.  The lender can forgive the debt or they may ask the borrower to sign a note to pay the deficiency (or a negotiated portion of the deficiency).

Q. Why choose a short-sale over a foreclosure?

A. A short-sale is much less damaging to one's credit.  A short-sale will show that the debt, while having some late payments was satisfied.  A short-sale will be a negative on one's credit for 12-18 months and one cannot obtain a new mortgage for 2 years.  A short-sale will drop one's credit score about 50 points.  In a short-sale there is only a possibility of a deficiency judgement.

The effects of a foreclosure are much more damaging.  A foreclosure will remain on one's credit for up to seven years.  You cannot obtain a new mortgage for 5-7 years.  A foreclosure will drop one's credit score approximately 300 points.  Foreclosures can have negative effects on employment. After foreclosure there is 100% chance of a deficiency judgement against the borrower. 

It is important to remember that being dissatisfied is not the same thing as being distressed.  In order to do a short sale, the borrower must be able to show hardship.  Hardship must be documented!  You cannot do a short sale if you have assets to pay the bank.  The bank will not accept a short sale under these circumstances. 

Next.....why you need a professional to handle the short-sale process

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