Short Sales and Your Credit

Short Sales and Your Credit

When buying a home, you may see some listings identified as a short sale. A short sale occurs when an individual must sell their real estate property for less than what they owe on their  mortgage. For example, if Sam took out a $400,000 mortgage on a house and still owes $350,000, but is only able to sell the house for $300,000, this transaction would be considered a short sale. During a short sale, the earnings from selling the house will fall short of the debts on the house. This involves accepting less than the expected amount, which means you, or more accurately your lender, will be losing money. While a short sale doesn’t sound like a good financial decision, in certain situations it can be your best option.

Are you house poor? Read this article for more information. 

Why Does a Short Sale Occur?

A short sale usually occurs when a homeowner is desperate to sell their house because they can no longer make payments on it and the house’s value ends up being less than the mortgage owed. The lender must agree to a short sale and be willing to accept a smaller amount for the property even though it’s worth more. This can happen either because:

  • The homeowner has more than one mortgage and can’t keep up with both
  • The homeowner simply can’t keep up with their current mortgage payments
  • The homeowner wants to move and change locations
  • The homeowner wants to avoid foreclosure (want to sell your home to become debt free, click here)

Short sales usually appear when the property is about to be foreclosed on. This means that the bank is threatening to take possession of the mortgaged property if the home isn’t sold.

Who Benefits From a Short Sale?

The Homeowner

Although a short sale doesn’t seem favorable for the homeowner, their house is being sold at a loss and therefore will not financially benefit from its sale. There is one major benefit for the owner, they will be avoiding foreclosure. This is very advantageous because foreclosure negatively affects your credit score. Thus, short sales are a fast way to sell your home and avoid a serious hit to your credit score.

The Homeowner’s Mortgage Lender

Although the mortgage lender will encounter a loss, short sales allow the lender to avoid foreclosing the property, all the headaches that come with it, and can resell the home.

The Buyer

A buyer can benefit from a short sale because they may be able to get the house for a fair and reasonable market price. Short sales can differ based on the home, the way it was maintained, and even the lender. Thus, short sales can be beneficial for the buyer depending on the circumstances of the home and the real estate market.

All Other Parties

All the agents involved, including the buyer’s agents, listing agents, appraisers, mortgage brokers and the insurance company should benefit in one way or another from a short sale.

Looking for more information on the mortgage payment options available to you in Canada? Read this

How Does a Short Sale Happen?

When debating whether or not you want to short sale your home, stop debating and speak to your lender. The homeowner has to receive permission from the lender (bank or investors) in order to sell their property for less than the mortgage amount that is still owed. This is because the lender will receive much less than what the house is worth. It is the lender’s job to determine whether or not the property owner can maintain making payments on the property or decide if a short sale is better than foreclosing on the home. In addition, it can take the lender a few weeks or months to make an assessment on the property. This is why we suggest you to speak to your lender as soon as possible. You can also cancel the short sale contract; so don’t worry if your financial situation changes and you decide not to sell the home.

With hopes of avoiding foreclosure, or just getting rid of a property that’s wearing you down, short sales are not always as bad as they sound. Yes, you are receiving less than what your mortgage is worth, but it’s much better than foreclosing your property and damaging your credit rating.

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