Many distressed homeowners are asking, “What is a short sale and can it prevent foreclosure?” This strategy has gained in popularity as foreclosure rates continue to soar because short sales allow borrowers to sell their home for less than is owed on their mortgage note.

When borrowers ask, “what is a short sale?” I offer the following explanation. However, before going into the details, it is important to understand each short sale transaction is handled differently and depends on the lender, property value, and financial status of the borrower.

Short sale literally means the property is sold short of what is owed. Lenders accept a discounted amount in order to eliminate a non-performing loan from their books and recoup a portion of costs incurred through the foreclosure process.

Mortgage lenders offer the option to short sell when doing so will cost less than foreclosure. A statement was issued by mortgage financier, Freddie Mac, claiming foreclosures cost banks an average of $70,000 per property. This includes outstanding loan balance, late fees, penalties, and legal fees.

Once lenders foreclose on real estate it is placed for sale through public auction. If the property does not sell, it is returned to the lender. Banks are then responsible for maintaining the house until it is sold. By allowing borrowers to sell the property for less than is owed, lenders can reduce financial losses and eliminate responsibility of caring for the property.

Not every property or borrower is eligible for short sale approval. Although there is no standard protocol most lenders require borrowers to fit the following criteria before authorizing short sales:

1. Borrowers must be delinquent on their mortgage note by 31 days or more, but not yet entered into foreclosure.

2. The appraised property value is less than the amount owed on the mortgage note.

3. Borrowers do not own assets which can be sold to repay the mortgage loan.

Short sales are handled by the bank loss mitigation department. Borrowers must contact this division to discuss available options and determine if they are eligible for short sale approval.

Eligible homeowners are required to submit a short sale packet consisting of financial records including payroll stubs, bank statements, tax returns, credit card statements, and a list of income and expenses.

Loss mitigators generally require borrowers to submit a short sale hardship letter describing events which caused them to become delinquent on their mortgage note. The letter of hardship should be carefully written and include a timeline of events, along with any actions taken to overcome financial challenges.

Two types of short sale options exist. The most common is Payment in Full without Pursuit of Deficiency Judgment. This type of agreement allows the borrower to walk away from their home without owing additional funds.

The second type of short sale involves lenders issuing a deficiency judgment against the borrower for the difference between the sale price and loan balance. Deficiency judgments remain on credit reports until fully repaid. For many people this can take years, if not a lifetime.

Real estate short sales can be complex and confusing. It is best to work with a real estate attorney or short sale specialist to ensure proper documents are filed. Presently, banks approve less than 20-percent of short sale applications. Oftentimes rejection occurs because borrowers did not file the appropriate paperwork.

Author Bio: Simon Volkov is a real estate investor who specializes in negotiating short sales with lenders. Simon is the author of “Short Sale Hardship Letter eBook Course; a popular step-by-step guide which answers what is a short sale and provides insider-secrets to obtaining short sale approval.

Category: Real Estate
Keywords: what is a short sale, prevent foreclosure, real estate short sales, short sale hardship letter