Short Sale Foreclosure: Blessing or Curse to Distressed Homeowners?

Short sale foreclosure refers to two types of real estate. The first involves properties repossessed by the bank because the borrower was unable to repay their mortgage loan. This is also referred to as real estate owned (REO) or bank owned real estate.

The second type of short sale foreclosure refers to an agreement where mortgage lenders allow borrowers to sell property for less than they owe on their loan. This option is usually offered when other options to prevent foreclosure have been exhausted.

At present, many banks hold a high number of non-performing loans. This references loans where borrowers are not paying and includes preforeclosure and foreclosure properties. Banks receive money from the U.S. Federal Treasury based on their performance. When borrowers do not pay, the Feds can reduce credit or cease funding altogether.

By law, mortgage lenders can only own a certain number of bank foreclosure properties. As more and more people are served with foreclosure notices, many lenders are quickly approaching their limit. Short sale foreclosure gives lenders opportunity to liquidate a percentage of their real estate holdings.

Short selling a house can be a blessing to borrowers who do not qualify for mortgage refinancing or loan modification. The short sale process generally takes four to six months to complete. In the best case scenario, borrowers can walk away from their home without owing additional money. This type of short sale is referred to as Payment in Full with Pursuit of Deficiency Judgment.

The exception is when banks issue deficiency judgments. Some mortgage lenders hold borrowers accountable for the deficiency between the sale price and loan balance. When borrowers hold two or more home loans, this amount can be astounding.

When deficiency judgments are issued, borrowers can encounter numerous financial consequences. Judgments remain on credit reports until paid in full. For most borrowers the deficiency can amount to several thousand dollars and take years to repay.

Deficiency judgments can prevent borrowers from obtaining any type of credit for years to come. Debtors have little chance of obtaining another home mortgage loan while the judgment is in place. Deficiency judgments seriously impact borrowers' credit worthiness and can take years to recover from the financial fallout.

When borrowers enter into short sale foreclosure agreements they should do everything possible to obtain a Payment in Full arrangement. This legally-binding agreement states the mortgage lender accepts the sale as payment in full and will not persue the borrower for the deficiency.

Short sale foreclosure will affect credit ratings. Payment in Full short sale is less detrimental than foreclosure or bankruptcy. The latter remains on credit reports for ten years, whereas short sales are reflected for seven years. Deficiency judgment linger until paid in full.

Each lender handles short sale foreclosures according to their established policy. When entering into a short sale agreement, borrowers are required to submit substantial documentation proving financial insolvency. When mortgage lenders accept a loss on their investment, they want proof the borrower does not own assets which could be used to satisfy the loan.

The majority of banks require borrowers to have a buyer in place before granting short sale approval. Occasionally, lenders will grant the borrower time to list their house through a realtor. The window of opportunity to locate a buyer is usually limited to two or three months. If a buyer is not found, the bank will commence with foreclosure proceedings.

A little known resource for locating buyers is to sell real estate to private investors or investment groups. Short sale foreclosures are attractive to investors because they are sold below market value. Selling to an investor eliminates the need for a realtor and improves the borrower's chance of obtaining short sale approval.

Selling to real estate investors saves borrowers and banks time and money. Banks can expedite the transaction because a buyer is in place. Borrowers don't have to locate a realtor or wait to find a qualified buyer. Investors benefit because they obtain property at discounted prices. When properly executed, short sale foreclosure offers a win-win solution to all parties involved.

Simon Volkov is a real estate investor who specializes in helping homeowners' negotiate short sale foreclosure with their lender. Simon provides information and resources to help borrowers understand the pros and cons of short selling. Learn more by visiting

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