Short Sales

One of the first steps to avoid foreclosure is often a short sale. This option is used when a homeowner isn't able to pay their mortgage and owes more on their home loan than what the home is actually worth in the current market. Using a realtor, the borrower (homeowner) lists their home for the current market value and the lender (bank) will take an offer less than the amount of the borrower's loan. An offer made must first be accepted by the homeowner before the bank approves. The lender, however, is not obligated to take a short sale – the process to get one approved in the first place is typically quite time consuming, and can take anywhere from three to six months to close.

Negotiating a short sale with lenders can be tricky, so homeowners should enlist a real estate agent for help. Banks take many factors into consideration when dealing with short sale approvals. This includes the borrower's financial situation, as well as the current status of the real estate market. While a short sale might not seem like a smart choice for lenders, the costs of foreclosing on a property can actually be more than the loss they would incur by taking a short sale offer. Furthermore, if a home is foreclosed, it will be auctioned off and can sometimes be left with no bidders at all. The bank then has to maintain and list the home on their own as an REO (real estate owned) property.

As a seller or buyer, there are both pros and cons with short sales. While this option is a way around foreclosure, sellers should know that the process can be very complicated and the outcome is not guaranteed. The requests are often turned down by the bank and a home will ultimately face foreclosure. Additionally, one's credit may take a hit as a result. Buyers, on the other hand, may get a great deal on a home through a short sale. Although, like sellers, they must deal with uncertainty and a long process.