Understanding the Short Sale

The term short sale refers to a lender entering into an agreement with a borrower to accept less than the full outstanding amount of the mortgage payoff. The goal for both parties is to avoid a costly and time consuming foreclosure proceeding. For a potential real estate buyer this simply means that instead of directly buying the real estate from the previous homeowner, you are actually negotiating with the homeowner’s lender for a purchase price. In other words, a home with an outstanding mortgage balance of $450,000 may be sold for only $400,000 and the lender will accept the lesser amount as complete payoff of the existing mortgage.

Some borrowers who have fallen on hard times are surprised to learn about the short sale options. Upon further examination, it is easy to see why a short sale is indeed an attractive option for a lender.

• First and foremost, bad loans that are about to go into foreclosure do not look good for a bank’s overall portfolio. It downgrades the bank’s overall desirability as an investment for those specializing in such funds.
• Next, auctions are notoriously iffy. A lender knows that even during a favorable auction the odds of taking in the full amount due and owing is slim. Thus, a short sale by a motivated seller is far more favorable and presents a chance to receive as much in payment as the money will bear without the lender incurring the added expense of forcing a foreclosure and subsequent auction.
• The softening real estate market has lenders scrambling to save as much of their assets as possible and now more than ever are these lenders willing to make deals on short sales that a few short months ago they would not have been willing to even consider.

In order for a lender to seriously consider a short sale proposal from a borrower, the real property in question must be nearing foreclosure. This is commonly referred to as the pre-foreclosure state. Pre-foreclosure may be defined as the moment in time the borrower falls behind on the payments; in addition, there are times when the default has been so extensive that the lender has already provided the borrower with a notice of default. This is usually the case when a borrower has failed to make three consecutive mortgage payments as stipulated under the original mortgage contract.

It is at this stage that the lender recognizes the borrower’s inability to cure the default and the short sale is now the next best option to prevent foreclosure. In addition to the foregoing, real property that might have fallen into disrepair and at auction would require to be sold as a fixer upper is a premier kind of candidate for a short sale. When there are second or even third mortgages to consider, lenders recognize that investors are going to be exceedingly careful to invest and at that time basic fiscal survival dictates to take whatever funds may be gotten from a short sale.