A recent report indicated completed foreclosures are at seven year lows. Property values have also risen over time. Yet in spite of this good news, real estate is always local. Homeowners facing foreclosure often don’t know where to turn and the lender always seems to have the upper hand. The lender almost has to as it has complete departments who do nothing but work with distressed homeowners. Perhaps the easiest way out is selling the home but what about those who owe more than their home is worth? Maybe home values have risen but not enough in some areas. The answer might be a short sale.
A short sale is an agreement between a lender and a borrower to accept less than what is owed on the mortgage as “paid in full.” If a lender is convinced the only way to avoid a foreclosure is to accept a short sale, it’s an option that can help borrowers avoid foreclosure altogether. However, the lender must agree to such an arrangement only after a thorough review has been completed.
The lender will ask for the homeowner’s complete financials including tax returns, bank statements and documentation validating the borrower’s distressed situation. A foreclosure is a lender’s last resort and accepting less than what is owed is much less costly for the lender. Say a homeowner owes $200,000 on a loan but the property is only worth $100,000. Selling would mean the homeowner would have to bring at least $100,000 to settle the mortgage. If the homeowner can prove the property is worth something closer to $100,000 and the lender agrees, a short sale may be arranged.
A short sale can’t work in every situation and the lender must be convinced the homeowner cannot keep the mortgage any longer, it’s a way for borrowers to get a fresh start without filing for bankruptcy or going through the foreclosure process completely.