The Skinny On Short Sales

According to the Mortgage Bankers Association, every three months, 250,000 new families enter into foreclosure in America.

The recent decline in property values has created many challenges homeowners, but a “Short Sale” could be the key to a happy ending.

So, what is a short sale? Very simply put, a short sale is when the value of the mortgage is greater than the value of the property.

It is said that 90% of homeowners do not understand the difference between a foreclosure and a short sale. A foreclosure is the process of the bank taking back ownership of a house due to the homeowner’s inability to pay their mortgage. The home is now an REO or bank-owned property, and the lender will sell it for the listed price.

A short sale, on the other hand, is sold by the homeowner before a foreclosure takes place. The listing price is determined by broker price opinions, recent comps in the area and the condition of the home. And ultimately, in a short sale, the lender agrees to accept less payment than what is actually owed to them.

By definition, any homeowner that is two months late on their mortgage payment and can also demonstrate the inability to pay their mortgage would be considered a short sale candidate. The homeowner is considered pre-foreclosure when the bank officially sends a notice of default or a notice that they’re taking legal action against the homeowner to collect the debt.

Contrary to what most folks believe, a short sale can still take place during the foreclosure process. There are only two reasons that a homeowner is not eligible for a short sale:

• The foreclosure has already taken place and the home is up for auction
• The homeowner files for bankruptcy

According to a recent Freddie Mac/Roper poll, more than six in 10 homeowners who are delinquent in their mortgage payments are not aware of services available to them that would help their situation. A short sale is a win-win. It’s a win for the bank because they can recapture as much of this non-performing loan as possible. It’s a win for the seller because they’re going to be forgiven for a large portion of the money they owe and are saving their credit. And it’s a win for buyers because they can obtain a property that is priced right.

What’s more, stopping a foreclosure before it happens is in fact helping the economy and the real estate market. According to experts, one foreclosure can result in as much as an additional $220,000 in reduced property value and home equity for nearby homes

Another reason a short sale is a better option than foreclosure is because it saves the seller’s credit from being damaged. A foreclosure can drop a homeowner’s credit score by 300 points or more. A short sale will affect a homeowner’s credit score by 80 to 100 points on the average. It reads on your credit report as a paid lien or paid judgment, and is much easier and quicker to repair than a bankruptcy or foreclosure. Written by Darryl Davis for RisMedia.