When a lender approves a short sale transaction, they’re approving a sale of the property for an amount that is less than the amount that’s owed on the home loan. But what happens to the differential? Is the outgoing homeowner required to pay it? Or is it forgiven? Well, that’s exactly what we’ll explore in today’s article from The Short Sale Gal Kristine Zelazo.
Who Pays the Financial Differential in a Short Sale?
In a short sale, there are a couple different options for how to handle the differential — the financial shortfall or the difference between the amount that’s owed on the home loan and the sale price of the property.
Of course, the bank has the option to either accept or reject a short sale offer. The larger the differential between the offer and the amount owed on the property, the less likely a bank is to accept the offer. The lender is required to consider a number of different factors, including the cost to pursue a foreclosure, the market value of the property (and how that compares to the offer) and the total number of distressed properties that the lender is holding at a particular point in time.
In some cases, the lender may choose to accept the short sale offer and forgive the remaining balance on the soon-to-be-former property owner’s home loan. This tends to be more likely in cases where the differential is relatively small, whereas larger sums are less likely to be forgiven. The other option is to pursue the borrower for the differential. So if the borrower owed $150,000 and sold the property for $100,000, the lender could opt to pursue the individual for the $50,000 difference.
The lender must also consider how much the borrower has paid back over time and whether the total amount repaid covers the principle. A large portion of every home loan is interest and as such, there are many cases where a homeowner who’s paid a home loan for the past 20 years has actually paid off the principle and then some. If the total amount repaid covers the actual amount disbursed when the loan was obtained, the lender tends to be more likely to forgive the difference, which would be purely profit. In cases where the principle has not been paid back in full, the lender is more likely to pursue the borrower for the financial shortfall following a short sale transaction.
The financial climate also impacts the likelihood of being held liable for the difference in a short sale. During poor economic conditions, lenders are generally more likely to forgive the difference as they have a large number of short sales and the chances of recovering the owed funds are reduced when compared to thriving economic conditions.
The decision of whether or not to pursue the borrower for the short sale financial shortfall is typically case specific. An experienced real estate professional and/or a real estate attorney can serve as an important ally as you seek to have the balance forgiven.
Notably, the total number of short sales has decreased in the past year. According to the most recent figures from 2016, short sales involving single family homes dipped by 37.5% statewide in Florida over the figures from 2015, while the number of short sales involving townhomes and condominiums dropped by 41.8%. This is a very significant dip, but not one that’s entirely unexpected considering the economic growth that has occurred in recent months.
Nationally, condo and townhouse short sales dipped by 38.7%, while single family home short sales dropped by 35.3% over the same one-year timeframe. A reduction in the number of distressed properties means there’s more competition for those properties — a fact that ultimately drives up prices. And that could spell good news for property owners who are facing a short sale. They’re apt to see a smaller differential.
Don’t forget to check out Kristine Zelazo’s related articles on 2017 Real Estate Market Predictions and Which Real Estate Markets Are Expected to Be the Strongest in 2017?
Ready to Get Started in Real Estate Investing?
If you’re getting started in real estate, consider working with a real estate investing mentor like The Short Sale Gal, Kristine Zelazo. Getting started in real estate investing can be somewhat challenging, but when done right, you can stand to make significant profits. You’ll have lots of advantages in this regard when you work with a real estate investing and short sale expert like Kristine Zelazo, better known as The Short Sale Gal.
Kristine has even launched a new program, called The Bird Dog Program, which is designed to help individuals get involved making money on real estate deals and short sales.
Based in Florida, Kristine works with both buyers and sellers and she is an experienced negotiator. So if you’re an investor seeking to get started in buying short sales and need a great mentor or wish to pursue a short sale transaction for the sale of your property, turn to Kristine Zelazo, the Short Sale Gal!
To get started with selling your home, simply complete the home pre-sale form to provide Kristine with additional information on the property in question. Then, call 800.664.0616, x802.