A shortsale references property that is being sold for less than is owed on the mortgage note. Banks engage in this type of financial transaction for several reasons. The primary reason is short sales are less costly and time-consuming than foreclosure.
The shortsale process takes between four and six months to complete, while foreclosures take up to eighteen months. In a report published by mortgage financier, Freddie Mac, the average cost per foreclosure ranges between $60,000 and $80,000. Although the lender accepts less than the full loan balance, short sales are less detrimental to their profit margin.
Banks receive money from the U.S. Department of Treasury based on their performance. Currently, the majority of banks are carrying numerous non-performing loans because millions of Americans are struggling to make ends meet. When banks hold too many non-performing loans, the Fed will limit or cease their line of credit.
Thirdly, banks are limited on the number of foreclosure properties they can own. Many mortgage lenders are quickly reaching their limit due to the never-ending stream of foreclosure homes. Several banks are forced to engage in short sale transactions to liquidate their real estate inventory.
Lenders that participate in short sales typically offer the option to short sell only after all other attempts to stop foreclosure have been implemented. These could include loan modification, mortgage refinance and real estate forbearance.
Loan modifications are a good choice for borrowers experiencing temporary financial setbacks and are able to get back on track quickly. They can be a disaster for individuals who do not possess the financial means to meet their monthly obligation, let alone payoff past due amounts.
Shortsales must be authorized by the originating mortgage lender. The process is notorious for being complex, time-consuming and frustrating. The best advice is to be organized, prepared, patient and polite.
Borrowers must work with an assigned bank loss mitigator throughout the process. This individual acts as a mediator between the borrower, lender and buyer. Loss mitigators do not make final decisions. Instead, they negotiate with all parties involved to develop a mutually-beneficial arrangement.
Mortgage lenders require borrowers to provide a short sale packet consisting of financial documents, income and expense records, a short sale hardship letter, and real estate documents. The majority of banks require borrowers to have a buyer in place before entering into a shortsale agreement. Others will allow the homeowner to list their property through a realtor and grant them a grace period of two or three months to sell.
Each lender handles shortsale transactions differently. Some lenders do not engage in short sales at all. The only way to know what foreclosure prevention options exist is to speak directly with your lender.
When properly structured, short sales can be a positive experience for all parties involved. However, it is important to understand the pros and cons to determine if a short sale is the best option. It is best to consult with a real estate lawyer or shortsale specialist who possesses experience in orchestrating this type of transaction.