Bob Musinski has written about a variety of financial-related topics – including personal and business loans, credit cards and personal credit – for publications such as U.S. News and World Report. He has worked as an editor and reporter for multiple.
Bob Musinski ContributorBob Musinski has written about a variety of financial-related topics – including personal and business loans, credit cards and personal credit – for publications such as U.S. News and World Report. He has worked as an editor and reporter for multiple.
Written By Bob Musinski ContributorBob Musinski has written about a variety of financial-related topics – including personal and business loans, credit cards and personal credit – for publications such as U.S. News and World Report. He has worked as an editor and reporter for multiple.
Bob Musinski ContributorBob Musinski has written about a variety of financial-related topics – including personal and business loans, credit cards and personal credit – for publications such as U.S. News and World Report. He has worked as an editor and reporter for multiple.
Contributor Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Updated: Jan 8, 2021, 8:17am
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When you’re in severe financial distress and can’t make your mortgage payments, you might consider a short sale of your home to unload as much of your mortgage obligation as possible—that is, if your lender agrees to allow it.
A short sale is complicated and will leave a negative mark on your credit record for several years, but it might be the best option to allow you to sell your home and escape more severe financial problems that could result from a foreclosure. The threat of losing a home could become more pronounced once the federal government’s pandemic-related foreclosure moratorium expires.
Here’s a look at how a short sale works and when it might be the right choice for you.
A short sale occurs when you sell your home for less than you owe on the mortgage, and your lender forgives the outstanding balance instead of pursuing a foreclosure case. A short sale is often a shorter process than foreclosure, but there’s no guarantee your lender will agree to this option.
Even though a short sale is similar to a typical home sale in certain ways–you would likely rely on a real estate agent to list the property, and it could be sold to a conventional buyer who finds it online–it takes considerably more paperwork and your lender will be heavily involved.
Short sales were more prevalent during the Great Recession when home values crashed in many parts of the country, leaving struggling homeowners with negative equity. Homeowners who could no longer afford payments often were forced into short sales.
Short sales aren’t nearly as common today, as just 3% of all mortgaged properties, or 1.6 million homes, had negative equity in the third quarter of 2020, according to CoreLogic, a property analytics firm. If you’re part of that small minority, though, a short sale could prove helpful.
The most significant difference between a short sale and a typical home sale is the lender’s central role in the short sale. While most home sales occur without the knowledge of the lender until the sales process is in its late stages, the lender is involved from the beginning of a short sale.
The result is a more complicated process in which the seller needs to get permission to start the process and doesn’t have control of how or when it ends because the lender decides which offer to accept.
Follow these two steps if you think you might need to do a short sale.
Once you realize you won’t be able to keep up with your mortgage payments and might be headed to foreclosure–in which the bank goes to court (in most states) to force the sale of your home–you may want to request permission for a short sale. You’ll pursue this option by:
Once you have approval to conduct a short sale, you’ll likely work with a real estate agent to get the house posted on the Multiple Listing Service (MLS) and entertain offers.
Since the home might be listed as a short sale–or agents for prospective buyers will soon learn that it is–you might not get as much serious interest as a non-short sale home listing would. Buyers are sometimes turned off by the potentially complicated and lengthy process of a short sale, especially if they have to sell a home of their own and need the timing of the buy/sell process to align perfectly.
While a typical home sale may close in 30 to 45 days, it could take months for a lender to approve a short sale offer—or reject it.
When you receive offers, they will be shared with your lender, which will sign off on the one that it prefers. Then, assuming all financial issues are resolved–including resolving any home equity loans and home equity lines (HELOCs) and liens on the property–the closing can take place.
A short sale is likely the better short-term and long-term option for both you and your lender. While a short sale would be initiated by you with permission from your lender, a foreclosure is a legal action the lender takes to repossess your home if you’re not making payments on it.
A short sale is preferable because it’s:
You’re going to suffer damage to your credit whether you pursue a short sale or your house goes into foreclosure. The credit bureaus may treat a short sale and a foreclosure the same—meaning the damage is severe and nearly identical in either case. This would occur if the credit bureaus don’t distinguish between a short sale or a foreclosure; either may appear on your credit reports as “not paid as agreed,” according to the credit bureau Equifax.
However, if you can convince your lender to issue a deficiency waiver, your credit might not take as big a hit.
Still, how many points you’ll lose on your credit score largely depends on where your credit was prior to encountering financial problems. The Fair Isaac Corp., which produces the widely used FICO score, says you could lose between 70 and 160 points off your credit score. It also will take years to recover.
