What is a Short Sale?
A short sale is an arrangement in which a lender agrees to accept a mortgage payoff that falls short of the balance that is owed by a borrower. In other words, a bank agrees to accept less than what is owed on a borrower's mortgage. It is important to note, however, that this arrangement does not always make the remaining balance due "disappear." Sometimes, the borrower remains legally and financially responsible for that amount. However, a foreclosure is avoided through the short sale process, which is the primary goal so that the borrower's credit is not as severely damaged as it would be through a foreclosure. If a foreclosure is imminent, a short sale can help soften the blow.
A foreclosure can put a serious black mark on a person's credit. As a result, and because of the stress that the foreclosure process can cause, most homeowners are willing to consider just about any alternative. When facing foreclosure, the worst thing that a homeowner can do is nothing at all. By being proactive, a borrower can often find viable alternatives to foreclosure and a short sale is one of the most popular and realistic options. For those who are facing the prospect of a foreclosure, a short sale might be the right option.
Benefits for Lenders
Why would a bank or other mortgage lender agree to a short sale? At first glance, it may not appear to have any benefit for a lender. They are, after all, accepting less than they are owed. The typical foreclosure will cost them considerable amounts of money, far more than they would lose through most short sale scenarios. In both situations, the lender is going to lose out to some degree; with a short sale, though, they will generally lose a lot less money. By accepting a short sale, the lender will lose some of the original value of the loan. However, with a foreclosure, the lender will lose the entire remaining balance of the loan, and they will also be responsible for paying property taxes while they legally own the house. A lender may also find himself responsible for maintenance, upkeep or in very poorly maintained properties, remodeling costs, in order to sell the property, and they will also need to pay fees to a real estate professional when the home is re-sold to a new owner. The foreclosure process also ties up a lot of a lender's resources, reducing their productivity. Finally, foreclosures appear as black marks on lenders' histories, too; by agreeing to a short sale, a lender ca n boost their statistics and look better on paper by preventing the worst kind of bad debt, a foreclosure, from hitting their books.
Benefits for Borrowers
A short sale presents many prime benefits to a borrower. Most importantly, a short sale allows a borrower to limit some of the negative impacts that a foreclosure has in terms of creditworthiness. A foreclosure will cause many issues for borrowers in the future. A foreclosure will tarnish your creditworthiness and remain on your credit record for 7 years. Another key benefit that a short sale brings to the table for borrowers involves time. While the short sale process can be long and frustrating, it's still a lot less stressful and has less detrimental effects than the typical foreclosure.
Next: The Short Sale Process