What is a Short Sale?

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What is a Short Sale?

Due to many borrowers falling behind on mortgage payments following the recession, a short sale has become a popular option that saves financial institution the unpleasant work of forcing people out of their homes through foreclosures and also offering borrowers an option to avoid bankruptcy. In times of economic decline it presents a reasonable option to both lenders and borrowers.

Short sales are an arrangement where financial institutions accept discounted payments on loan balances from struggling borrowers who have fallen behind on payments. When a customer realizes that they are no longer able to make payments on their mortgages, they can approach their creditors with a request to have them accept an amount that is less than the actual balance of the loan they are to pay. This arrangement can be beneficial to both parties as it helps the borrower keep their home while saving the creditor the hassle and fees that are involved in a foreclosure process.

Once the creditor agrees to a short sale, the borrower or his agent will source for a buyer willing to pay the amount agreed with the creditor. There is a lot of paper work involved in this process and it will usually require assistance from a lawyer or other professional who is well versed in this kind of transaction. The borrower cannot make a profit under this arrangement and all proceeds are paid directly to the creditor, the only advantage for them is that they avoid foreclosure or having to file for bankruptcy. However it must make economic sense to the lender to be undertaking a short sale or else they will take the foreclosure route if it will be more economical for them in the long run.

It is important to point out that though a foreclosure sounds great, it is very involving. It will have a negative impact on your credit score though this will be less than the damage foreclosure or bankruptcy would cause. There are very strict rules and guidelines that are followed when analyzing if an applicant qualifies for a short sale. There are properties that do not qualify for a short sale and you will need to engage a real estate professional to advice you on whether your property qualifies or not. Lenders will only consider circumstances that are beyond the borrower to allow a short sale. Unemployment, death, bankruptcy, medical emergencies and divorce are some of the situations that lenders will consider. Lifestyle decisions, pregnancy, bad neighbors and other such reasons are not acceptable grounds.

An important point when going through a short sale is to get the lender to issue a letter that relieves the borrower of any obligation to pay the balance owed after the short sale. Failure to get this may be a lee way for the lenders to come after you in future. To ensure this and other similar loop holes are sealed and to make sure that your short sale works out in your best interest it is advisable to have a lawyer representing you and guiding you through the process.

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