In 2018, approximately 4.5 million American homeowners owed more on their homes than their homes were worth. Experts call this being underwater on a mortgage.
When people owe more on their homes than their worth, it can cause them to suffer financially. Having an underwater mortgage is one reason people turn to short sales.
What is a short sale, you might wonder? Here is a guide to help you learn what it is, why people use them, and how to sell your house through this method.
What Is a Short Sale?
When you think of selling your house, you probably think of hiring a real estate agent to help you find a buyer.
Selling through a real estate agent is the traditional way to sell a house, and you can still use an agent with a short sale. A short sale works in a different way, though.
The best way to understand a short sale is by learning the short sale definition. You can check out these terms, too, to learn more about other related house-selling terms.
The definition of a short sale is a home sale where you sell your house for less than you owe.
Suppose you owe $200,000 on your house and want to use a short sale. Through a short sale, you won’t have to sell it for $200,000. Instead, you can sell it for less.
When you sell it for less than you owe through a short sale, your lender forgives the difference. In this example, the lender would forgive $50,000 if you sold the house for $150,000.
If you decide to sell this way, you must tell your real estate agent that you want to use a short sale. The agent will advertise this in the home listing, as it’s a necessary thing for buyers to know.
Why Do People Sell Their Homes This Way?
You might wonder why people sell their homes this way, and there are several reasons.
Underwater Mortgage
As mentioned above, you’ll find that some short sale homes occur from underwater mortgages. If you owe more than your house is worth, you might face difficulties paying your mortgage.
If you want a way out of an underwater mortgage, you could sell it for an amount that is less than your current mortgage loan.
Avoid Foreclosure
Secondly, some people choose to sell a short sale house to avoid foreclosure. Imagine if you fall behind on your mortgage payments and can’t catch up.
Your lender might give you some time to pay the arrears, but eventually they will file the foreclosure proceedings on your home. If you don’t act quickly, you’ll lose your house.
Losing a house to foreclosure is bad for your credit, and it might lead to a lot of stress and anxiety. If you can sell through a short sale, you can avoid foreclosure.
Urgent Need to Sell
People might also sell this way due to an urgent need to sell. For example, if you have to relocate for your job next month, you might need a way out of your home right away.
If you’re going through a divorce, you might also need a way out. People sometimes also use these when they get sick or injured and can’t afford their payments.
How Do You Sell Your House Through a Short Sale?
Now that you understand the basic principles of short sales and the reasons people use them, you might wonder how to sell your house this way.
The first step of a short sale is contacting your lender to ask for their approval. You can’t sell your house this way unless your lender agrees to it, and you’ll have to ask.
Secondly, you’ll have to sign some paperwork with your lender that creates an agreement between you and the lender.
This paperwork might tell you the lowest amount you can accept for your home. It might also state the fees involved with the transaction.
The next step is finding a buyer. You can find a buyer in several ways. One option is by listing the home through a real estate agent. Another option is by seeking a cash home buyer in your area.
In any case, you must tell the buyer that you are selling through a short sale. They’ll need to know this, as short sales often take more time to close.
Short sales might also involve rules that do not apply with traditional home sales. Your paperwork will state what these are, if there are any.
Are There Repercussions of Selling Through a Short Sale?
The last thing to understand is the potential repercussions of selling your home through a short sale. Are there downsides to this method? Will you face consequences if you use it?
One of the main consequences you might face is a larger tax liability.
If you sell your house for $50,000 less than the amount you owe, you might have to claim this $50,000 as income on your tax return. This is not always the case, but it does apply in some situations.
You’ll need to talk to your lender to find out if this will occur. They can tell you, and you should find this out before choosing to sell through a short sale.
The other potential risk is a deficiency judgment. Some states let lenders sue homeowners for the difference in sales price versus their mortgage balance.
You can also ask your lender about this before agreeing to sell through a short sale. If your state allows this, the lender might sue you for the difference.
Consider Selling Your Home With This Method
After reading this guide, do you know the answer to this question: “what is a short sale?” If you still have questions about selling this way, talk to your lender or a cash home buyer.
If you enjoyed this article, check out the rest of our site to find more information about home sales.