What is a Short Sale?
In the world of real estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less then the full balance due on the debt, and usually "forgives" all or a large portion of the difference.
How will the Short Sale affect my credit?
Short sales are still a relatively new concept. Banks have the option of submitting the short sale to the credit bureau as "Paid in Full" or "Settled for Less than Full Balance." As far as your credit score is concerned there is no evidence whatsoever to support that a short sale will lower your credit score. Some have the idea that this is like a bankrupcy or a foreclosure. That's far from the truth! In a short sale the lender is simply allowing you to pay less than you owe!
If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit! How? Because once you are approved for the short sale, all collection activity will STOP and you will avoid foreclosure!
Who benefits from the Short Sale?
Short Sales are a win-win situation. Lenders, Homeowners and Realtors all benefit from the successful short sale. Mortgagors get the majority of their money back, mortgagees (homeowners) get the relief they need and are able to sell their property and avoid foreclosure, and Realtors can facilitate the transaction and receive compensation (commission) from the sale of the property.
Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property "back" through foreclosure, a short sale often makes a much wiser business decision for the bank.
This sounds too good to be true!?
Not really. Things that are "too good to be true" usually don't make economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is, mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.
What is negative equity?
Also known as being "upside down" negative equity is the difference between the value of the asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased.
Some areas decline in value. In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants or needs to sell within 2-3 years of purchasing their property, they may in a situation where they have negative equity.
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