Have you heard someone say they were “underwater” on their home? This means they owed more on their mortgage loan than their home was worth.
A short sale can be an option for homeowners struggling to keep up with their mortgage payments.
In this article, we’ll explain what a short sale is, how it works, and the pros and cons of short sales for both the seller and buyer.
What Is A Short Sale In Real Estate?
A short sale in real estate happens when the borrower cannot cover their mortgage payments and has to sell their home. The proceeds then go to their mortgage lender, and the borrower will have to pay any outstanding debt the sale doesn’t cover if the lender wins a deficiency judgment against them.
A short sale is an alternative to foreclosure, which damages the borrower’s credit more and provides no repayment to the lender.
Because homes usually deteriorate under an owner in financial trouble, real estate sold in a short sale has a reduced price. As a result, investors and first-time buyers can benefit by purchasing property at a lower cost than usual.
Why Does A Short Sale Occur?
A short sale occurs because the homeowner can’t afford their mortgage payments. This financial inability can arise from various factors, such as job loss, unexpected medical bills, or a pay cut.
Additionally, the homeowner must owe more than the home is worth for a short sale to occur. For example, if a homeowner’s mortgage balance is $225,000 and their home is worth $200,000, the lender could grant permission for a short sale.