What's a Short Sale? Short Sale Process & Alternatives

Posted by Justin Havre on Monday, July 15th, 2024 at 9:42am.

What Does Short Sale Mean in Real Estate?

Maybe you’ve seen the term in a real estate listing. Maybe you’ve been suggested it as an alternative to foreclosure. But what does “short sale” mean when it comes to homes?

Short selling a house is, essentially, getting your lender to agree to let you sell your home for less than your outstanding mortgage balance. This can benefit both the seller and the lender in various ways.

Understanding the intricacies of short sales can be pivotal in making informed decisions about housing and financial stability.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Short Sales in a Nutshell

Short sales are typically made by homeowners in financial distress
Short sales involve selling property below the mortgage balance and must be approved by the lender
Short sales are a homeowner's voluntary decision requiring active participation, unlike a foreclosure
Short sales offer a controlled alternative to foreclosure with a less severe credit impact
Because foreclosures are typically more expensive than short sales, short sales can benefit the lender as well as the seller

What Is a Short Sale in Real Estate?

A short sale in real estate involves homeowners selling a property for less than the outstanding mortgage balance. This option is typically pursued when homeowners face financial distress and cannot afford their mortgage payments. Unlike foreclosure, a legal process initiated by the lender to recover the property due to non-payment, a short sale is a voluntary decision by the homeowner to sell the property before it goes into foreclosure.

One key difference between a short sale and foreclosure is that in a short sale, the homeowner actively participates in the sale process, working with the lender to negotiate the sale price and terms. In contrast, foreclosure is a more passive process for the homeowner, where the lender takes possession of the property to recover the outstanding debt.

In a short sale scenario, the lender may agree to forgive the remaining balance of the mortgage after the sale, or they may pursue a deficiency judgement against the homeowner for the shortfall. Despite potential financial implications, short sales can offer homeowners a way to avoid more severe credit impacts associated with foreclosure. By proactively engaging in a short sale, homeowners can mitigate some of the negative consequences of financial hardship.

How a Short Sale Benefits Sellers

When you’re behind on mortgage payments and can’t catch up, the first thing you should do is talk to your lender about your options. Lenders may be willing to help you modify your loan or defer your payments until you can get back on your feet. When that’s no longer possible, though, a short sale is generally preferable to foreclosure, because:

It allows the homeowner more control over losing their home
Lenders may agree to forgive the remaining debt balance after the sale
Short sales have a less profound impact on credit scores than foreclosures
Short sellers can apply for a mortgage sooner than with a foreclosure
Short sellers generally pay few or no closing costs on a short sale

How a Short Sale Benefits Lenders

If you’re offering less money than you owe, why would a lender agree to a short sale? One reason: foreclosing a house is an expensive process. In addition to judicial expenses, your lender will have to take on ownership expenses such as maintaining the home until such a time as they can sell it. In addition, the lender will typically still lose money with a foreclosure sale, as many foreclosure sales don’t sell for full value.

If a lender agrees to a short sale, they’ll typically recoup more money than if they pursued foreclosure.

Short Sale vs. Foreclosure

In comparing short sales to foreclosures, homeowners facing financial distress must weigh the significant differences in credit impact and legal consequences.

Foreclosures, initiated by lenders due to missed mortgage payments, have a more severe impact on credit scores and can even lead to bankruptcy. On the other hand, short sales are a voluntary process homeowners undertake to sell their property for less than the mortgage owed, with the lender either forgiving the difference or potentially pursuing a deficiency judgement.

While short sales and foreclosures both result in the homeowner losing possession of the property, short sales offer a more controlled and potentially less damaging alternative for those in financial difficulty. Short sales allow homeowners to avoid the legal ramifications and credit damage associated with foreclosures, providing a proactive approach to resolving financial distress. By understanding the differences between short sales and foreclosures, homeowners can make informed decisions to mitigate the impacts on their financial well-being.

Short Sale Process: How Does a Short Sale Work?

Generally speaking, you shouldn’t try to initiate a short sale until your mortgage is already in default. If a foreclosure isn’t looming, your lender doesn’t have much motivation to take a loss on your loan.

Inform Your Lender

Proper communication with the lender is crucial when embarking on a short sale process. Lender approval is a fundamental requirement for selling a property for less than the mortgage owed. Informed and transparent communication with the lender is essential to effectively navigate the complexities of the short sale process.

Lenders hold the final decision-making power in approving or rejecting a short sale proposal, making their cooperation pivotal for a successful transaction.
Providing accurate and detailed information to the lender is key to gaining their approval and moving forward with the short sale.
Clear and open dialogue with the lender is the cornerstone of a successful short sale transaction.

Lenders will generally require proof of financial hardship before approving a home sale. Speak to your lender for specific documentation requirements.

By keeping the lender informed every step of the way—from demonstrating financial hardship to presenting a compelling case for the sale—homeowners can increase their chances of obtaining the necessary approval for a short sale.

Find a Buyer

When seeking to complete a short sale process, the homeowner takes on the responsibility of finding a qualified buyer for the property. This task involves actively marketing the property, highlighting its potential, and negotiating with potential buyers. The homeowner, often with the assistance of a real estate agent, must ensure that the buyer is willing to purchase the property at a price approved by the lender to facilitate the short sale successfully.

This extra step in selling a short-sale home and the extra paperwork involved can make the process take much longer than many buyers expect. Getting approval for a short-sale offer can take weeks or months. Patience and follow-up are key.

Finding a buyer who understands the intricacies of a short sale and is committed to seeing the process through is crucial.

Send the Offer to the Lender

Once a suitable buyer is identified, the homeowner and their real estate representative collaborate with the lender to finalize the sale and obtain approval. Since the lender is the one ultimately taking the loss, they have the final say in accepting offers.

Upon receiving the offer, the lender can accept, reject, or propose a counteroffer based on their evaluation of the property's value. Clear and effective communication between the buyer's agent and the lender is essential during this phase to address any inquiries promptly and ensure a smooth offer review process.

Ultimately, the lender's decision regarding the offer holds significant influence over the timeline and overall success of the short sale transaction, underscoring the importance of this stage in the process.

How Long Does a Short Sale Stay on Your Credit?

A short sale can significantly impact your credit score and financial future. In Canada, the effects of a short sale remain on your credit report for years. During this period, potential lenders, landlords, and even some employers may view your credit history and see the short sale as a negative mark.

However, you can typically apply for a new mortgage much sooner than with a foreclosure. A short sale will also usually have less of an impact on your credit score, depending on the circumstances. Still, it can easily knock your score down by 100 points or more, with higher initial scores receiving greater penalties.

Canada’s two main credit bureaus, Equifax and TransUnion, keep records of negative credit information for differing lengths of time, which can also vary by province. In general, negative credit information stays on your credit report for six or seven years. On the other hand, positive information stays on your credit report for 10 years with Equifax and 20 years with TransUnion. By province, negative credit information remains on your report:

British Columbia - No negative information older than 6 years, unless the information is voluntarily supplied by the consumer
Alberta - No longer than 6 years from incurring the debt or from the last debt payment, whichever is later
Saskatchewan - No longer than 6 years from incurring the debt or from the last debt payment, whichever is later
Manitoba - No negative information older than 6 years, unless the information is voluntarily supplied by the consumer or otherwise permitted by the Personal Investigations Act
Ontario - No negative information longer than 7 years from incurring the debt or from the last debt payment, whichever is later, unless the creditor or the creditor’s agent confirms that the debt or collection is not barred by statute and the confirmation appears in the file
Quebec - No legal minimum or maximum, but no negative information longer than 6 years is the common threshold
Newfoundland and Labrador - No longer than 7 years for mortgage default; No longer than 6 years after a debt has come due or from the time of last payment, whichever is later
New Brunswick - No longer than 6 years from incurring the debt or from the last debt payment, whichever is later, unless the creditor or the creditor’s agent confirms that the debt or collection is not barred by statute and the confirmation appears in the file
Nova Scotia - No longer than 6 years from incurring the debt or from the last debt payment, whichever is later, unless the creditor or the creditor’s agent confirms that the debt or collection is not barred by statute and the confirmation appears in the file
Prince Edward Island - No negative information older than 7 years, unless the information is voluntarily supplied by the consumer; Judgements may remain for 10 years unless the creditor or his agent confirms that it remains unpaid in whole or in part and such information appears in the file

The extent of the damage to your credit score largely depends on your overall credit profile and how well you manage your finances post-sale. Proactively working to rebuild your credit, such as paying bills on time, reducing debt, and avoiding new credit inquiries, can help mitigate the long-term effects. Understanding the duration and impact of a short sale on your credit is crucial for planning your financial recovery and moving forward with confidence.

Alternatives to a Short Sale

The best action when faced with a looming financial burden is to consult with the bank or mortgage company as early as possible. Explain the situation and ask for advice. Possible ways to avoid a mortgage default, for a homeowner who has a previously unblemished credit history and a record of making payments on time, might include:

A 60- or 90-day suspension of regular payment
Adding the unpaid principal and interest to the end of the loan
Reducing the amount of the payment for a specified period
Refinancing to lower the monthly payment to a manageable amount.

While no single solution is right for everyone, and not all lenders will be amenable to making any concessions, it is certainly not beyond the realm of possibility and always worth a try.

If a lender is unwilling to consider other options, a homeowner might consider the possibility of selling quickly for cash. A number of reputable firms now buy distressed properties, and, under the right circumstances, the prices paid can be quite attractive.

The worst thing is to do nothing. If there is an expectation of change in your future—for example, a new job or a return to work after a period of disability—disclose the situation to your lender and attempt to buy some time.

Buying a Short Sale Home

When considering buying a short-sale home, buyers should focus on key points to guide them through the process efficiently. Getting financing in order, finding a suitable home, doing thorough research, and making a compelling offer are crucial steps in purchasing a short-sale property. By understanding these points and being prepared, buyers can navigate the complexities of buying a short-sale home with greater confidence and success.

Get Financing

Securing financing is a crucial step when purchasing a short-sale home. Buyers looking to acquire a short-sale property should ensure they have a pre-approval letter when submitting an offer. This is, of course, unless they plan to pay all cash.

Financing for a short-sale home may differ from traditional home purchases, potentially requiring a higher down payment or different loan terms. Lenders often have specific requirements or restrictions when financing a short-sale purchase, so it is essential to be prepared for these nuances. Working with a lender with experience in handling short sale transactions can help streamline the financing process and provide valuable insights into navigating any challenges that may arise.

By being proactive and informed about the financing aspect of buying a short-sale home, buyers can better position themselves to successfully close the deal and secure their desired property.

Find a Home, Do Your Homework

Buyers looking to purchase a short-sale home should thoroughly research the property's history, condition, and potential repair costs. Due diligence is crucial, as short-sale homes may have hidden issues that are not immediately visible.

Understanding the property's background can help buyers assess the level of investment needed for repairs and renovations.
Buying a short-sale home typically involves a longer process and higher risks compared to traditional purchases.
Being financially prepared to provide cash upfront, obtaining repair estimates, and making realistic offers are key steps in the buying process.
Collaborating with a real estate professional experienced in short sales can aid in navigating the complexities efficiently.

While purchasing a short-sale home can offer the advantage of lower prices and reduced competition, buyers should approach the transaction with thorough research, caution, and a willingness to invest time and effort into the process.

Make an Offer

Navigating the purchase of a short-sale home involves understanding the unique process of making an offer. When considering buying a short-sale property, keep in mind that the timeline for the transaction may be longer than with a traditional sale. Lender approval is a crucial step in the process, impacting both the timeline and acceptance of your offer. Delays are common as lenders review and negotiate offers on short-sale homes, so patience is key.

Short-sale properties are typically sold in as-is condition, meaning you should factor in potential repair costs when determining your offer. To effectively navigate this process, working closely with your real estate agent is essential. They can help you understand the intricacies of buying a short-sale home and assist in negotiating with the lender for a successful purchase.