It is not uncommon for a homeowner to be facing foreclosure when they have taken out a mortgage against their property. In such cases, a short sale is the perfect solution for the homeowner to avoid foreclosure. Although it may seem like a one stop solution to everyone facing the problem, there are certain risks associated with a short sale for both the buyer and the seller.
What is a short sale?
For those who are not yet familiar with the concept of a short sale, let’s start by defining it. A short sale is the selling of a home by the owner for an amount that is exceeded by the total debt balance on the mortgage. This is a way in which a homeowner can avoid foreclosure.
Risks for sellers
This is one of the biggest risks that sellers take when making a short sale on their home. A deficiency is the difference in the total debt on the property and the selling price of the home.
To understand it better, let’s take the example of a homeowner that gets the approval to sell their property for $300,000 but the amount owed is $350,000. This creates a deficiency of $50,000. In most states, the lender reserves the right to seek personal judgment against the seller for the recovery of the deficiency.
To evade a deficiency judgment, the short sale agreement must specifically state that the current transaction fully satisfying the debt and the lender approves to waive their rights to the deficiency.
The Application and Approval Process
The process is extremely frustrating for the seller because the short sale must be approved by the lender and their loss mitigation department. Most short sales fail to materialize because the lender takes their sweet time to analyze the deal before they come to a decision. The decision can be both in approval or a rejection.
The deal can be rejected by the lender if the selling price is lower than the fair market value or is lower than the listing price.
Fortunately for borrowers, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) have made the processes much more streamlined so that the approval can be quick and easy.
Risk for Buyers
Prices are not what they seem
Buyers get attracted towards short sale offers when they look at the price, but the initial price was set most likely by the real estate agent, which is why it was low. When it comes to the actual price after the price has been approved by the lender, the lender has to minimize their loss, which is why they will make the price go up and the buyer will find themselves wasting a lot of time being interested in a property they cannot afford.
Not in good condition
Most short sale homes are sold in a hurry and the buyer receives them in the condition that they are, which means any long term repairs will all come under the buyer’s responsibility.
In case you are considering buying or selling through short sale, consider talking to a lawyer who specializes in these cases. Contact Covert & Covert, LLP at (630) 717-2783 or online, to schedule a free consultation today. We have offices in Schaumburg, Warrenville, and Naperville.