Short Sales: What They Are, How They Work

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In today’s home market, you have likely heard the term “short sale.” Many people don’t know what a short sale is or how it works. A short sale is generally a last-ditch move on the part of both a homeowner and a lender. It happens when the homeowner needs to sell but is lacking in the equity needed to break even.

Equity And Home Selling

In simple terms, equity is the difference between what you owe on a home and what the home is worth. Equity is something that is generally built over time, and grows as the homeowner makes payments and the value of the home goes up. But when the market runs into problems such as an economic downturn, home values may drop. This can result in a situation where a homeowner is in fact “upside down”—they owe more than the home is worth.

In most cases, the best decision is to ride out the difficult time and wait for home values to rise again, as they generally will do over time. However, there are situations where a homeowner may find it absolutely necessary to sell, even if they can’t get enough to pay off the mortgage. This is where short sales come in.

What Is A Short Sale

Essentially, a short sale is an agreement between the lender and the homeowner to allow the home to be sold at a value lower than the balance on the loan. Lenders aren’t eager to allow short sales, but in most cases it is a better option than having to foreclose on a property.

In a short sale, the lender generally makes a deal to take care of the remaining balance. There may be a settlement with the homeowner allowing them to pay a flat fee.

Should You Short Sell?

In most cases, short selling is not a good option. There are many other ways to deal with being upside down on your home rather than a short sale. The first step is to try to refinance the home and lower the payments so that you can build equity faster. Most lenders would rather help you refinance than deal with the cost of a foreclosure or short sale.

You should also consider making renovations to improve your home’s value. This can bring you a lot closer to breaking even on the value. A short sale is really a last resort; take the time to look at all your other options first.

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