Basically, the term “short sale” is used when lenders allow borrowers to sell their property for less than what they owe on their mortgage. Therefore, when a short sale is approved the homeowner is given the opportunity to avoid foreclosure by selling their house at a discounted price.
However, short sales are not quite as simple as they sound, and not all houses qualify. For example, once the property falls into foreclosure, it is no longer eligible. Otherwise, here is a simplified list of what must happen before borrowers can qualify for a short sale:
- Borrowers must be at least 31 days delinquent on their mortgage loan.
- Borrowers must owe more than the appraised value of their property.
- Borrowers cannot own assets which can be used to repay the home loan.
Homeowners wanting to apply for a short sale will also be required to submit a short sale packet which includes a variety of financial documents. On top of that, you will most likely be require to write a short sale hardship letter explaining what led to your delinquent loan.
If you are wondering why banks would accept less than what is owed, you bring up an excellent point. Several reasons exist, but the primary reason is because short sales cost less than foreclosure. According to Freddie Mac, foreclosure costs lenders between $60,000 and $80,000 per property.