Two years ago, the biggest problem homeowners faced was foreclosure. This year, troubled homeowners are trying a different method to help themselves out of a difficult situation -- short sales. Since 2008, the number of completed short sale transactions has tripled. This year, around 400,000 short sale transactions are slated to conclude.
A short sale is a transaction where a homeowner sells their home for less than what is owed on the mortgage, which can be very attractive to those with underwater mortgages. The proceeds from the sale are given to the lender as full or partial payment against the mortgage. If the proceeds from the sale are less than the amount owed on the mortgage, the lender may agree to forgive the difference -- or go after the former homeowner for the deficiency.
Usually, the homeowner's lender or, in the case of a second or additional mortgage, more than one lender, must approve the short sale. If there are multiple mortgages on the property, the transaction can quickly become complicated and time-consuming because the homeowner must wait for additional approvals. Multiple lenders can cause frustrating delays if they disagree over the terms of the sale or simply take their time putting the paperwork through. In a large percentage of cases, the buyer's offer is withdrawn before the short sale is approved.
For troubled homeowners, a short sale can seem attractive because it may allow the homeowner to protect their credit rating. If a good credit rating can be preserved or salvaged, that can help a homeowner buy property later on. However, there are many risks to short sales, and they may not be appropriate for all distressed homeowners.
In comparison to foreclosures, short sales are usually less expensive for lenders. Short sales are also preferred by lenders because they do not have to take ownership of the property. Banks prefer not to become property owners because banks do not like to be in the business property management.
Source: The Washington Post, "Walking Away With Less," Dina ElBoghdady and Dan Keating, September 26, 2010