HOW SHORT SALES ARE BETTER THAN FORECLOSURES!
No homeowner, on the signing day for a new home, imagines he or she will face a foreclosure. However, unfortunate life events can plunge an unprecedented number of homeowners into the distressing process of losing their homes. The foreclosure process can be long, stressful and severely damaging to the homeowner’s savings, assets and credit. It’s a frightening situation.
However, there is another option for some homeowners. A short sale is a transaction in which the bank lets the delinquent homeowner sell the home for less than what’s owed. The borrower finds an agent and puts the house on the market, often at a substantial discount. The hope is that, if the home sells, the lender will recoup the majority of what the homeowner owes. This saves the lender the expense of a foreclosure suit and the possible long-term cost of owning a hard-to-sell foreclosed home.
A short sale doesn’t absolve the borrower from the debt he or she incurred with the original mortgage, but it can be better than a full-on foreclosure.
It can protect your credit.
From a lender’s perspective, it’s better to recover a portion of a mortgage loan than to absorb a total loss. Therefore, in lieu of a foreclosure, banks will often settle for a short sale. This allows both the lender and the homeowner to end up in a better position.
One concern for many homeowners, however, is whether the bank will sue for a deficiency judgment after foreclosure. In an attempt to recover the difference in the amount that was paid and the amount of the loan, the bank can file a lawsuit against the homeowner. A deficiency judgment will appear on a homeowner’s credit report and have a negative impact, just as a foreclosure would.
But rather than endure a costly and possibly lengthy litigation process, a bank will often cut its losses with homeowners who are unable to pay their mortgages due to a proven hardship, such as a divorce or loss of income. And the reduced amount of money owed will ease the burden on the homeowners and not irreparably damage their credit.
It can prevent a foreclosure.
A foreclosure on a home adversely affects the homeowner in a number of ways, and it also has a negative effect on the lender and the housing market in general. The homeowner receives a mark on his or her credit that can make it difficult — sometimes impossible — to borrow money for another home, car or major purchase. Banks nearly always lose money on foreclosures; between the lower sale price they receive at auction and the resources they must assign to administer the foreclosure process, it’s rare for them to come out ahead at the end of a foreclosure.
The housing market also suffers from foreclosure, due to decreased home values. Foreclosed homes are less likely to be maintained and more likely to remain on the market for an excessive period of time, and they make it difficult for homeowners with good credit to upgrade into more expensive homes.
The average legal cost to a homeowner going through a foreclosure is around $7,500, according to the U.S. Congress Joint Economic Committee. Add in the additional costs that can accumulate throughout the sometimes lengthy foreclosure process, which could be just the tip of a burdensome financial iceberg. And if the homeowner is unable to afford payments, the foreclosure could eventually lead to a financial situation where bankruptcy — with its significant credit implications for the borrower and costs for the lenders.
Mortgage lenders won’t always file for a deficiency judgment in a foreclosure case. It depends on the situation and the likelihood that they can win back the amount owed on the property. However, if all sides agree on a short sale, a new buyer in a better financial state could absorb some of what the original homeowner owes the lender. This would ease the original homeowner’s hardship and put him in a more manageable position. Likewise, a short sale can drastically reduce the amount a bank may be looking to recoup from the homeowner.
It can help your lender.
As mentioned previously, a lender is also negatively affected by a foreclosure. After the cost — and time expense — of sending multiple notices and warnings to a delinquent homeowner, the lender faces additional costs as the foreclosure moves into the courts. Legal filings, hearings and the associated documentation all take time and money to prepare. After the foreclosure sale, the lender may sue to recover money that’s owed above the amount that a home was sold for in a foreclosure, adding to legal costs. Also, since the lender gains ownership of the property, the lender faces the expenses and dilemmas every homeowner faces when selling a property: If it takes time to sell, it can become a very expensive burden. Even if the sale doesn’t stretch on, the lender must still hire a real estate broker to administer the sale of the house.
However, in opting for a short sale, the lender can recover a portion of the money that’s owed on the property, thus reducing the loss without the extensive legal process of a foreclosure. In many cases, a short sale reduces the lender’s total loss to a level where it’s more financially savvy for him to write it off, rather than sue the former homeowner.
It gives homeowners more control.
Once the ball starts to roll in a foreclosure, an arduous and stressful process begins for the homeowner. The mailbox starts to fill up with demand letters and confusing documents, and constant exchanges with the lender’s legal team ensue.
In a short sale, there are still negotiations, meetings and paperwork for the homeowner to weave through. But the process plays out more like a traditional sale, as opposed to a litigious and pressure-packed foreclosure proceeding.
Any real estate sale can be somewhat stressful, but a short sale will allow the homeowner to play more of an active role in the process and deal mainly with the bank, the home buyer and the real estate agent. Overall, a short sale is much more manageable for the homeowner than being at the mercy of a bank’s attorneys during a foreclosure.
It can offer the seller peace of mind.
Real estate transactions generate a whirlwind of activity between the buyer and the seller, and they’re often stressful by nature. But they don’t compare to the pressure that a homeowner is under during a foreclosure. The major credit hit, the drawn-out legal process and the overall stigma attached to foreclosure can be quite unnerving.
Short sales are not exactly risk-free when it comes to the seller’s credit, and they won’t completely diminish the financial implications when homeowners are unable to pay for a home that they purchased. But a short sale will open the door to solutions for homeowners that can allow them to avoid legal action and the lengthy, laborious foreclosure process.
Short sales can leave homeowners in a much more positive position, lessen their financial burden and salvage their credit to a degree. A short sale can provide “light at the end of the tunnel” to homeowners and offer them a platform from which to start rebuilding financially.