What is a Short Sale, and Who Qualifies For One?

Recently I have received a number of emails and calls from San Jose and Silicon Valley homeowners who are “upside down” in their homes and want to sell that property and “move up” into a bigger house, better neighborhood, or higher performing school district. They contact me to see if they can do a short sale and get out from under their loan, and several seem to think that they can pull equity out from that property to purchase the next home.

It doesn’t work that way.

There are a lot of misconceptions about short selling a home, and what a short sale is, and who qualifies for a short sale, so this post is aimed at clarifying what it’s all about.

short sale signsA “short sale” is a sale of the property in which the lender (or lenders) accepts a “short payoff” to get the home conveyed to the new owner. The “short” in short sale refers to the lender not getting paid back what was promised by the borrower/homeowner.

Why would a lender agree to taking less than what is owed? The answer is simple: only if it’s the lesser of two evils, the other being a foreclosure (which would cause a greater loss to the lender in most cases).

Under what circumstances will a lender agree to a short sale? There are a few conditions which absolutely must be met if a seller will even consider a short payoff:

  1. The homeowner has some sort of significant hardship (such as the death of a spouse and loss of that spouse’s income, divorce, job loss, serious medical illness with large medical expenses)
  2. The monthly payments can no longer be made (in part or in full)
  3. The owners or property does not qualify for a loan modification
  4. The property owner has no other assets which could be sold to make up the difference between sale price and loan balance (such as a vacation home, stocks, etc.)
  5. In many cases, lenders will not consider a short sale unless payments or parts of payments have been missed (the owner is in or near default status)

A few very significant ramifications occur when there is a short sale:
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