Part of the deal when taking out a mortgage is to make regular mortgage payments until your loan is fully repaid. However, if you suffer financial hardship at some point, you may find yourself unable to continue making your payments. This can put you at risk of defaulting on your mortgage and facing possible foreclosure. To avoid this, homeowners can consider a short sale as a option.
Let’s dig deeper into what a short sale is and its benefits and shortcomings for both homeowners and buyers.
What Is A Short Sale?
A short sale is a real estate transaction in which a homeowner sells their home for less than what they still owe on their mortgage. This typically happens when the homeowner is experiencing financial distress and can no longer make their mortgage payments, but the market value of the property is lower than the remaining loan balance.
A homeowner may opt for a short sale as a way to avoid foreclosure if they’re suffering financial hardship. In this case, the lender agrees to accept the sale price of the home as full repayment of the mortgage, despite the sale price being less than what is still owed.
Can You Short Sale Your Home?
Yes, you can sell your home in a short sale to avoid foreclosure if you’re struggling financially. Before considering a short sale, you’ll need to ensure that you qualify for this process:
Proof Of Assets
You’ll need to prove to your lender that you don’t have the financial means to continue making mortgage payments to get approval for a short sale. As such, your lender will want to see documentation that backs your financial hardship. This can include documents such as:
- Bank statements
- Pay stubs
- Medical bills
- Termination notice from work (if you lost your job)
Hardship Letter
A hardship letter explains how you found yourself in financial distress, the steps you’ve taken to get yourself out of this situation, and why a short sale is the best choice for your circumstances.
Liens
If you have other liens, aside from a lien on your home, they will first need to be released before completing a short sale. Other liens can include tax liens and construction liens, among others.
You’ll need to provide your lender with documentation for any additional liens that you may have. You can either pay the liens in full or come up with an alternative arrangement with your creditors.
How Do Short Sales Work?
If you can’t keep up with your mortgage payments and are at risk of foreclosure, you may choose to initiate the short sale process. However, you’ll first need the lender’s approval beforehand. Here is how short sales work in Canada:
Prove Your Financial Hardship
As mentioned earlier, you must be able to demonstrate that you’re experiencing financial hardship, such as job loss, reduced income, or medical issues, making it difficult or impossible to cover your mortgage payments. In this case, you’ll need to prepare a short sale package, which includes all the financial statements and other documents to prove your financial hardship.
You may also need to be underwater on your mortgage, which means you owe more on your mortgage than what your home is currently worth. In this case, the market value of the home is not enough to cover the mortgage debt.
Sale Of The Property
Once the lender agrees to a short sale, you can list your home for sale. It’s ideal to work with a real estate agent who is familiar with selling homes under these unique conditions. Further, the listing should disclose the fact that it’s a short sale.
When you receive an offer, you’ll need to submit it to your lender for approval, who will then determine whether the offer meets their requirements for accepting an offer less than the mortgage balance. The lender will want to see the listing agreement, the offer, the buyer’s pre-approval letter, and a copy of the deposit.
Bank Review And Approval
The bank will go over the offer. Until the bank approves the transaction, the deal cannot be finalized.
This process can take weeks or months. As such, the buyer of a short sale must understand the potential risks involved in buying a home under these conditions, including the extended wait time that is typical of a short sale.
Short Sale Vs Foreclosure: What’s The Difference?
Both a foreclosure and short sale are options that are available to homeowners who are no longer able to make their mortgage payments. However, there are some key differences between the two.
Short Sales Are Voluntary And Foreclosures Are Forced
Homeowners can initiate a short sale and are not forced to take this route. That said, you must first get the lender’s approval to go ahead with a short sale, since the lender must accept a lower sale price than the outstanding mortgage. You must also be able to show that you’re unable to make mortgage payments due to financial hardship.
On the other hand, a foreclosure forces a homeowner out of their home, typically against their will. This is the main difference between short sales and foreclosures.
You May Still Owe Money With A Foreclosure
With a short sale, the lender will consider your debt paid despite the sale price being less than what is owed. However, with a foreclosure, the lender can come after you if the house sale does not cover the outstanding mortgage balance.
Effect On Credit Score
While a foreclosure can stay on your credit report for 6 to 10 years, short sales typically last for a shorter period. This can have a negative effect on your credit score.
During this time, prospective lenders, landlords, and some employers can see that you’ve experienced a foreclosure or short sale in the past, which can hurt your chances of getting a loan until these remarks are removed from your credit report.
However, the effects of a short sale on your credit score are generally less pronounced than a foreclosure.
Benefits of A Short Sale In Canada For Sellers
Homeowners who wish to sell their homes under a short sale may do so to take advantage of the following perks:
Avoid Foreclosure
Perhaps the biggest benefit of choosing a short sale is to avoid losing your home to foreclosure. With a short sale, you’ll have more control over the process, considering this is a voluntary option compared to being forced out of your home with a foreclosure.
Quicker Return to Homeownership
Since the effect of a short sale on your credit score is less significant than foreclosure, you may be eligible for a new mortgage sooner, depending on how quickly you recover financially.
Less Damage To Credit
Further, a short sale has a less severe impact on your credit score than foreclosure, though your score will still be affected. It’s also generally possible to start improving your credit score from a short sale faster than after a foreclosure.
Cheaper
The fees associated with a short sale, including selling fees and legal fees, are generally lower than they are for foreclosures. This is because the lender may help cover some of the costs associated with selling the home, including real estate commissions.
Short Sales For Buyers: Should You Buy A Short Sale Property?
A short sale can offer both perks and drawbacks for buyers. Be sure to weigh them all before deciding whether to purchase a home through a short sale.
Pros
The benefits of a short sale for buyers are as follows:
Lower Price
The biggest draw of a short sale for buyers is the potential to get a discounted price. Short sale properties are typically listed at a price under market value. This allows buyers to save thousands of dollars on a home purchase.
Instant Equity
If you get a good deal on a home, there may be an opportunity to take advantage of instant equity in the home, which can also increase over time. Not only does this give you more stake in the home, but you can eventually tap into your equity if the need for extra money arises, such as through a home equity loan or HELOC.
Avoid Complications Of Foreclosures
A short sale can be a better alternative to a foreclosed home if the goal is to get a good deal. Short sale properties are usually less complicated than foreclosures. For example, there may be fewer issues with ownership transfer and complexities related to the title or liens.
Cons
Short sales can also be problematic for buyers in a few ways:
Fewer Disclosure Requirements Compared To Traditional Listings
Homes that are owned by the bank and are sold via short sale do not have the same disclosure requirements as other listings. So, if the home has ever had any issues in the past, such as problems with the plumbing or foundation, you may never find out. If you purchase a short sale home without knowing about these issues, it can cost a lot of money to fix.
Lender Has Control Over The Price
The price the seller lists the home at doesn’t always mean the lender will agree to it. The lender has control over a short sale and will have a say in how much the home is listed and sold for. Ultimately, it’s the lender that has the final say in the price of the home, not the seller.
Short Sales Are Sold As Is
Short sales are often sold “as is,” which means the buyer must be willing to take the home in its current condition without expecting the seller to make any repairs before the deal closes. That potentially means more money and time investing in fixing the place up after you take possession.
Time-Consuming
It can take weeks or months for the lender to approve a short sale. Sometimes, several approvals are needed, which can drag out the deal. This leaves you waiting for a very long time before the transaction is finalized and you can finally take possession of the home. And in some cases, the deal may even fall through, despite having waited all that time.
Where Can You Find Short Sale Properties?
Aside from perusing the internet for short sales in Canada, you may be able to find these homes on real estate websites, realtor.ca. In addition to performing a search using the “short sale” keyword, try other terms and phrases to pinpoint homes being sold as a short sale, such as “subject to lender approval.”
Perhaps the best way to find short sale homes in your area is to work with a real estate agent, particularly one who is experienced with these types of transactions and has their finger on the pulse of properties available through a short sale. Some agents even have specialized credentials to deal specifically with these properties.
Final Thoughts
A short sale can help you avoid foreclosure if you can’t cover your mortgage payments any longer and your mortgage balance exceeds the current value of your home. But you may first want to explore other options, such as mortgage modification or refinancing. Otherwise, a short sale may be your last resort before you’re forced out of your home due to foreclosure.
