It’s likely you’ve heard of a short sale before, but you may not fully understand what it means. Short sales are often considered to be negative events, but this depends on your relation to the sale, your financial situation, and certain other details. In fact, sometimes a short sale can be a good solution for all parties: the buyer, the seller, and the lender.

Basically, a short sale occurs when the seller agrees to an offer that’s so low, it won’t cover what they still owe on their mortgage. Say a house appraised at $250,000 was purchased with a $250,000 mortgage. Due to market circumstances, the value of the home drops to $175,000, and the owner also falls on hard times financially. Still owing $210,000 and fearing foreclosure, the owner may choose to ask their mortgage lender for permission to sell their home for the current value of $175,000. If the lender approves, this becomes a short sale scenario.

Now, some lenders may prefer to simply foreclose on the property, because they will take owership of the home and may have a better chance of recouping their original investment. However, they’ll need to turn around and sell the home quickly, as well as deal with any costs related to the sale, so they might actually prefer to avoid those hassles and take the lesser amount of money they would receive from a short sale. Regardless of other circumstances, a short sale can only occur with the permission of the lender.

While a seller will experience damage to their credit from delinquency and going through with a short sale, a foreclosure would harm their credit much more. Additionally, a short sale allows the buyer the dignity of selling their home rather than losing it, and it allows them to stay in the home until the sale goes through, rather than abandoning the home or being evicted during foreclosure. And in a short sale, the lender will pay real estate commissions and other closing costs, even though these would normally fall to the seller.

If you choose to buy a short sale property, you’ll likely benefit from a bargain price. However, the process usually takes much longer than a traditional home sale, and the lender will likely want to negotiate with you to increase their bottom line, since they’ll have to pay for things they normally wouldn’t have to. You’ll also probably have to buy the house “as is,” since the seller probably can’t afford to make any repairs, and the lender won’t want to. Short sales are not recommended for first-time home buyers, and if you do choose to participate in a short sale, make sure you have a realtor who is experienced with their intricacies and quirks. Even if you’ve made an offer on a short sale home, it’s a good idea to keep looking at other properties to see if there’s an easier, faster buy out there that will meet your needs, or in case the whole deal falls through. Your realtor should include this flexibility in the purchase agreement he or she draws up for the short sale.

As with most real estate transactions, there are benefits and risks involved with short sales for the lender, seller, and buyer. If you’re interested in purchasing a property through a short sale, be sure to discuss it with our family of VA loan specialists and lenders. At Fortress VA Loans, we’ll offer you guidance and advice every step of the way until you receive the keys to your new home!