If you are one of the many homeowners who have fallen behind on your mortgage payments and you don't see any way to avoid foreclosure, a short sale may offer you the least painful way to resolve the situation.
A short sale is when a lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the home by a financially distressed owner. The lender forgives the remaining balance of the loan.
What's in it for a seller?Obviously, the ideal scenario would be that you magically catch up on your mortgage payments and keep your home. But for an increasing number of Americans, that is not a realistic possibility, so it's to your advantage to take an active role. This is what a short sale is all about -- resolving the problem, as opposed to simply hiding from your lender and hoping the issue will go away or, worse, walking away from the property.
As a seller, there are cons to a short sale. Obviously, you will lose your home -- but that will happen anyway when the bank forecloses. You will also walk away without a cent in profit from the sale. And, your credit score will take a major hit.
However, because you are making a good faith effort, the lender may look more favorably on you, and perhaps be willing to help minimize the damage to your credit score. You are also spared the stress and embarrassment of a long drawn-out foreclosure process. That's may allow you to feel more in control and that you have a more direct role in paying off part of the debt. Remember, too, that every short sale is a negotiated agreement between the owner and the lender. In a foreclosure, the lender can always pursue the seller for a deficiency judgment to recoup the difference between what it was owed and what it actually collected. In a short sale you may be able to get the lender to accept the sale as "payment in full without pursuit of any deficiency judgment." The lender might agree to that release in return for the seller showing the home, maintaining it as well as possible and not trashing it on the way out.
Two short-sale killersBefore you even start considering getting involved in a short sale, there are two situations in which an attempt at a short sale is almost certain to fail.
An attempt at a short sale will fail if:
- No default on loan -- Lenders almost never will accept short sale offers or requests for short sales until the borrower is far behind in payments and a notice of default has been issued.
- Bankruptcy -- If the seller has filed for bankruptcy, forget it. Few, if any, lenders will consider a short sale when the seller has filed for bankruptcy, because negotiating a short sale is considered a collection activity and collection activities are prohibited in bankruptcies.
The lender's motivationWhy would your lender let you walk away from the home and forgive the shortfall on your loan? To save time and money. Foreclosures are expensive and time-consuming for lenders. Once the lender realizes that a foreclosure is inevitable, a short sale may seem like the lesser of two evils. Plus, short sales help the lender look good on paper -- the property was never listed as an actual foreclosure, which helps the lender's numbers.