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How Does a Short Sale Work?

Owning a home remains the American dream for many people. That dream can quickly turn into a nightmare, however, if you fall on financial hard times and are unable to pay the monthly mortgage payments. If the real estate market has also taken a downturn, making your home worth less than what you currently owe on it, you may find yourself in a serious bind. One option may be to enter into a “short-sale.” As a seller, a short sale may allow you to get out from under your mortgage without owning the lender additional funds even after the sale of your home. If you happen to be a buyer looking to purchase a home it also helps to understand the short-sale concept in case you find a home that interests you that is listed as a short-sale.

To understand the short-sale process you first need to understand how a mortgage loan works and a little bit about the real estate market. Most people cannot afford to pay cash for the purchase of a home. To finance the purchase of a home most people take out a mortgage loan and then make monthly mortgage payments for 15-30 (typically) years until the loan is paid off. At any time during the life of the loan a borrower may sell the home and pay off the mortgage with the proceeds from the sale. Of course, that assumes that the proceeds from the sale will be sufficient to pay off the balance owed on the loan. If the real estate market takes a drastic turn for the worse, as often happens during a recession, that assumption could be wrong.

Residential real estate appreciates, on average, about three to five percent a year. Therefore, if you have been in your home for several years or more you should have no problem selling the home for more than you currently owe on it under normal circumstances. If, however, the housing market takes a nose dive, and property values plummet as occurred just recently in the U.S., the market value of your home could decrease significantly in a very short period of time. When that happens, you may find yourself in a situation where you cannot sell the home for what you owe on the mortgage. Your lender, of course, will be aware of the current market conditions as well and may be willing to take less than what you owe on the mortgage as payment in full under the circumstances. This is a “short-sale.”

If your lender does agree to consider a short sale the lender will ultimately need to approve the sales agreement you reach with a prospective buyer. This is why is can take longer for an offer to be accepted if the home is a short-sale.