What is a short sale and how does it relate to the foreclosure process?

The term “short-term sale” is increasingly used in the real estate world as the real estate market has moved to a more sustainable level of growth. The declining value of homes over the past few years has resulted in homes costing less than the mortgages used to finance the purchase. This situation, combined with a nationwide recession that has made people want to sell their homes despite being “underwater,” has led to the recent popularity of short selling.

What is an underwater loan?

A home loan or mortgage in excess of the actual value of the home is considered “underwater”. This has become commonplace over the past few years, as homeowners who bought at the peak of home prices with little or no money saw their property values ​​go down, sometimes dramatically. They started with a $ 300,000 home loan, which was about the same value, and now their mortgage amount is about the same, but the same house is valued at less than $ 250,000.

With the rise in unemployment, many homeowners in this difficult situation have been forced to sell their homes because they can no longer afford mortgages. The problem that arises is that even if the homeowner sells his home for $ 250,000, he still owes the bank $ 50,000 more, delaying the sale process. This hurts everyone involved because the original owners cannot pay off the mortgage, so they will not pay off the loan. New buyers who are delighted with the home are not allowed to buy it at the new market price. Finally, the bank that owns the mortgage will not allow the original owner to sell, does not receive the monthly mortgage payment, and now has to go through a costly and time-consuming foreclosure process to get possession of a home that they can only sell for less anyway.

Buying and selling a home with a short sale

This is where short selling comes into play. In the case of a short sale, the original submerged homeowner will obtain the bank’s consent to complete the short sale and market their home at the current local price. When a buyer decides to buy a home, the bank agrees to conduct the sale and take on the losses on the original mortgage. Ultimately, this type of legal settlement allows the homeowner and the bank to avoid the costly and loan-risky foreclosure process. The owner will still suffer from their credit rating and the bank will lose some of the money as a result of the transaction, but the overall solution is much better than transferring the home foreclosure.

Foreclosures and short sales

Short selling is becoming more common with our current home price correction and high unemployment, but many groups still make it very difficult for owners because they don’t want to take on loan losses. For this reason, many banks do not consider short selling until homeowners are several months overdue on their mortgage. In addition, banks reserve the right not to accept the price a new buyer offers for a home if they find it too low. This creates tensions between all parties involved and, if not resolved, results in a possible foreclosure of the home.

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