What is a Short Sale? Why do it?

Realtors®

What is a Short Sale? Why do it?

A Short Sale is when the lender of record agrees to discount their payoff on the sale of a house when:

The borrower has experienced hardship and is unable to repay the mortgage.
The value is proven to be less than the amount needed to pay off all loans, encumbrances and real estate selling costs.
The loan is delinquent or in default.

Often a house in which the proceeds of a sale will fall short of what the home owner still owes on the mortgage, lenders will accept the lesser proceeds as a short sale. By doing this the lender forgives the balance of the mortgage and thereby avoids a lengthy and costly foreclosure procedure.

How do Sellers Benefit from a Short Sale?

The seller can avoid having a “foreclosure” on their credit report. Most lenders tend to report “settled” upon successful closing of a short sale. Recent reports state that if a borrower misses 2-5 mortgage payments, their credit score will be affected by an estimated 30 to 60 points. If a borrower suffers foreclosure, it can affect their score 140 to 200 points.

Assuming the seller is already not making mortgage payments, they can continue to live in the property and not make payments during the lengthy short sales

Most sellers feel it is the “right thing to do” when in default. They tend to feel that walking away from the house is irresponsible and unfair to the lender. It’s a respectable option.

How Do Lenders Benefit from a Short Sale

Not having another “bad debt” on the books. Most investors require their lenders not to exceed 3% of bad debts on the books.
Not having to complete the expensive foreclosure process including all of the legal fees and procedural duties.
Not having to evict occupants and pay for their cooperation.
Not having to rehab the property. (i.e., Contractor bids, disgruntled borrower vandalizing, etc.)
Not having to later sell the property for no more than the proposed short sale would generate, or even less when the market continues to decline.
Not having to pay a commission to the R.E.O. broker they choose to market and list the property for them.

(from realtyu.com)