Thursday, September 2, 2010

Avoiding Foreclosure with Short Sales

Every once in a while, I'll post some very technical concepts and try to break it down into simple, understandable ideas that are very applicable in common situations.

Everybody knows about foreclosures; you get behind on your mortgage payments and the bank reclaims your home.  It's just the same concept as getting your car repossessed, only foreclosure involves a long drawn out process where the bank slowly recoups your home and auctions off your home to try and salvage any remaining value.  Foreclosures involve hefty fees for the bank, and unfortunately, will ruin the credit scores of the borrowers.  One way to avoid foreclosure is to negotiate a short sale.

A short sale can be negotiated between the borrower (homeowner) and the lender (usually a bank or mortgage provider).  Instead of forcing foreclosure on the property due to lack of payment, the homeowner and the lender mutually agree to try and sell the home at a discounted price, where the homeowner turns over all the proceeds to the lender.  Usually, a short sale is the most economically feasible solution because it is typically faster and less expensive than foreclosure.

How Short Sales Benefit the Lender (vs. Foreclosures) 
  • Lender will usually receive more net proceeds from the short sale than they would in a foreclosure.
  • Short sales are typically quicker, allowing the lender to avoid further mortgage non-payments.
  • The short sale process and fees associated with it are typically less expensive for the lender.

How Short Sales Benefit the Borrower (vs. Foreclosures)
  • Faster process means less missed mortgage payments
  • Borrowers are able to lessen the damage to their credit history
  • Borrowers get out of an unaffordable situation

Now, there are downsides to short sales as well.  In most cases, there is a deficiency, which is the remaining money owed following the short sale.  In many situations the borrower is not off the hook for the deficiency unless it is clearly indicated on the acceptance of the offer, but the debt can be controlled and financed.  Also, there is no guarantee that the lender will agree to the short sale offer.  Lenders typically have loss mitigation departments to deal with short sale offers.  Their loss mitigation departments usually have a set of criteria including amount of equity and anticipated sale price that they use to evaluate the potential in short sale offers.  With the recent financial crisis, lenders have been more willing to accept short sales than force foreclosure.   

Sometimes in life, situations arise where you might find yourself struggling financially.  If you are upside-down on your mortgage or behind on payments, you do have options.  Take the time to educate yourself to know whats available to you.

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