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Short Sale for Prevention of Foreclosure

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By : Julie Thompson    99 or more times read
Typically a short sale is held to stop a property from going into foreclosure. A bank or lender will often agree to a short sale if they believe that its financial losses incurred will be lesser than those incurred by going through the foreclosure process. Avoiding the implications of the foreclosure process is an added incentive for the home owner as a foreclosure reflects severely on their credit history.

A short sale is a much faster process than a foreclosure and far less expensive. Basically this means negotiations take place with lien holders to pay them back at discounted prices. You could call this the “sale of a debt”. By no mean does this cancel the remaining balance unless a settlement is clearly defined in the offer of acceptance.

When the income of a real estate sale is less than the balance owed on the home, the mortgage holder or bank may agree to discount the loan. Generally speaking this is due to the home owner being in economic hardship. Negotiation for a short sale is conducted through the lenders loss mitigation department. The home owner then sells the property at a cost which is less than they owe on the balance of the mortgage due and this is where an investor or home buyer can make money. The proceeds of the sale are given to the bank or lender and sometimes, not always, the debt to the bank is settled. This happens in 99% of cases; if the short sale has a deficiency balance the borrower will be the one liable for its repayment. Only the lender is able to decide whether to approve or disapprove of a short sale.

The deficiency balance remains after a short sale, however the broker, loan officer and closing agent are still paid what they are owed. This is a hybrid transaction and is not governed by any regulatory agency.

It is only in extenuating circumstances that a bank or lender discounts a loan balance on a mortgage. Circumstances such as these are completely relative to the kind of real estate market we are experiencing at the moment, as well as the financial situation of the borrower.

Short sales are standard business transactions and allow investors to take advantage of the current property slump. When looking for foreclosed or auction properties, if you see the words “short sale” do not discount this as a possibility in acquiring discounted property, the opportunity exists.

Short sales recognize that creditors are not doing anyone special favors, but are merely entering into a business transaction. It makes no sense whatsoever to stay engaged in a financial transaction with someone who is continually defaulting on their mortgage. Rather approve the short sale process and receive as much of the debt back as quickly as possible, instead of waiting for months and in some states years to recover some of the debt, which after taxes and interest would probably be even less.
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