How Do Short Sales Prevent Foreclosure?
By: Gary Rapoport
Short sales
aren’t right for every borrower, but a short sale can offer you the
chance to break free of a stifling mortgage loan while also avoiding
a foreclosure on your credit report and in your county ‘s public
records. Understanding the short sale process and its potential to
prevent foreclosure is a crucial step in making the final decision
concerning how you plan to handle your inability to pay your home
loan.
How the Short
Sale Process Works
Through a short
sale, your lender allows you to market and sell your home
independently. Any proceeds from the sale, however, go to your
lender. These types of sales are known as “short sales” because
you’re selling your home for less than you owe. Thus, the purchase
price the buyer pays falls “short” of the mortgage balance. If you
have equity in your home, you can sell the property on your own
through a standard sale without obtaining prior permission from your
mortgage lender.
Short Sale
Eligibility
The eligibility
requirements you must meet before being approved for a short sale
will vary depending on your lender. Most lenders, however, will
require that you submit detailed financial records proving that
paying your current mortgage payment is either impossible or causing
you and your family considerable strain.
If you’re in
danger of foreclosure, discuss the possibility of a short sale with
your lender before you default on your mortgage. Once your mortgage
loan is in default, your lender will begin foreclosure proceedings
against you regardless of whether or not it previously approved a
short sale. Thus, initiating the short sale process as early as
possible increases your chances of selling the home before the bank
can foreclose.
The Mortgage
Deficiency
The vast majority
of homeowners who request short sales have underwater home loans and
can neither sell nor refinance the property. Should a lender
foreclose on an underwater home, it too will be unable to sell the
home for enough money to cover the previous mortgage balance and any
additional fees and charges the former homeowner incurred. The
difference between the sale price of the home and the amount the
former homeowner owed on his mortgage is a mortgage deficiency.
How Short
Sales Impact Deficiency Balances
Most short sale
lenders agree not to pursue homeowners for any deficiency that may
result through a short sale. This isn’t altruism – it’s a business
move. A lender’s foreclosure expenses can easily exceed $50,000 and,
in many cases, it can never successfully recover the deficiency from
the borrower. Thus, a short sale causes the lender to lose money,
but its losses are less than they would be had it proceeded with
foreclosure.
Just because most
lenders don’t pursue deficiencies doesn’t mean that yours won’t. If
your lender agrees to allow you to sell your home for less than you
owe without pursuing the deficiency, get it in writing. Otherwise,
you may be stuck making mortgage payments on a house you no longer
have access to long after the short sale closes.
A short sale can
prevent a foreclosure, but only if you see a mortgage default coming
ahead of time. While you may be able to negotiate with your lender
to stall foreclosure proceedings for a certain amount of time after
you stop making payments, the bank won’t wait forever to claim its
secured asset. If you have additional liens on the property, this
can also impact your ability to sell your home short. Contact your
lender to find out its guidelines regarding short sales and discuss
those rules with an experienced real estate professional before
deciding whether a short sale is the foreclosure alternative that
works best for you.
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