What is a short sale?
A short sale is an agreement between a lender and borrower for the sale of a property for less than what is owed on it. In other words, the sale proceeds are short of paying off the loan on the property. It is also sometimes referred to as a short pay. A home is said to be underwater when its market value is less than the amount owed on it.
Does the owner of the property need the approval of the lender to complete a short sale?
Yes, they do. Usually, the borrower is behind on their loan payments, in addition to the property being underwater. With lender approval, the owner of the property can begin the process of completing a short sale.
What causes a home to be underwater?
We are not talking about a flood here. If a borrower obtains a low or no down payment loan to purchase a property, the property can be classified as underwater with a small downturn in the real estate market. So, if you purchased a home for $500,000 using a no money down loan, you would have no equity in the property. If the real estate market encounters a downturn and the market value of the property decreases to $450,000, the home would be considered to be underwater.
Why would someone do a short sale instead of riding out the down real estate market?
You might wonder this, as you might think, why not ride out the down market. The value of the house will come back as the real estate market is cyclical, right? Well, what if they could no longer afford their mortgage payments? Say, they lose their job. There are a wide variety of reasons the owner may need to get rid of the property. If it isn’t worth what they owe on the loan, they have a problem. So does the lender. This is the perfect situation for a short sale.
Are there any other alternatives for a borrower than a short sale?
Yes, the lender could foreclose on the property. However, the foreclosure procedure is expensive for the lender and will have a negative impact on the borrower’s credit. For these reasons, a short sale may be the best option for both parties.
What else can help me prepare to pass my real estate licensing exam on my first attempt?
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