First, a short sale is a sale of real estate in which the sales proceeds fall short of the mortgage balance owed on the property’s loan. Typically, a short sale is consider by a lender when a borrower has a financial hardship that prevents them from paying the balance owed on their mortgage loan and the borrower needs to sell to downsize, relocate or move for other reasons. The lender decides that selling the property at a loss is better than proceeding with collection efforts including foreclosure. Short sales are a type of debt settlement, and they can adversely affect a person’s credit report, though the negative impact is typically less than a foreclosure.
A short sale can be a complicated and lengthy process. In the past, many short sales would never come to fruition and the one that did averaged over 6 months to complete. And some lenders are extremely quick to reply and others are extremely slow. This should change dramatically. Now, under the Home Affordable Foreclosure Alternatives program (HAFA), lenders participating in the program must determine the market values of properties early on and inform the owners of just what price they are willing to accept. Then, if the lender is presented with offers within the established value, they have to be accepted within ten days. Yes, ten days!
This is a huge change from even just a couple of months when the short sale market was stalled and most people would the process as real estate hell. Because lenders stand to lose so much on these transactions, they have been reluctant to make short sales happen, often waiting months before answering offers presented to them. But that long wait has been changing as banks are realizing that they make out far better financially with a short sale than a foreclosure.
Short sales are the hottest thing going in the distressed property market, and the trend is likely to get even hotter in the coming weeks, when the government starts handing out cash to encourage lenders to close these deals.
For a borrower, a short sale can be an alternative to foreclosure. It allows them to stay in the property until a short sale is approved by the lender and it is sold. The borrower and lender consent to the short sale process and are involved with sale price negotiation. The borrower and lender can come to an agreement of any short fall of balance owed. Also, expenses necessary to complete the sale, including real estate commission, are taken care of from the sales proceeds.
Also, under the HAFA program, homeowners who complete a short sale can receive up to $3,000 from the federal government for a “relocation incentive” and there are financial incentives for lenders completing short sales.