Are You Underwater and Being Foreclosed on? Don't Be Afraid of Short Sales!

What exactly is a short sale? It is a situation where a property is sold for less than the amount owed to the lender. In this case, the bank or mortgage company must accept this lesser payment in order for the short sale to go through. This benefits the lender in that they get a quick sale at or near the current market value of the home, instead of having to foreclose and having the property go on their books as bad debt. The homeowner benefits because their mortgage is paid in full, and their credit is improved as a result of the mortgage being listed as paid off on their credit report. This is much better than having a foreclosure on their record, which is one of the events most damaging to a person's credit profile. The homeowner is then able to get a fresh start with a new home once their finances improve.

Another benefit to the homeowner is the avoidance of potential future costs. If the home is foreclosed and goes to a trustee sale or auction, the homeowner may be liable for deficiencies and other costs. In a short sale negotiation, these costs are normally eliminated.

What hardships justify a short sale? They include: unemployment or reduced income, unforeseen medical bills, failing health causing inability to work, failure of a business, adjustment in the mortgage payment or any other significant increase in monthly expenses, death of a spouse, separation or divorce, or any other circumstances that hinder ability to pay the mortgage.

When should the short sale process be started? Normally, a loan modification should be tried first, where the bank modifies the mortgage payments to make them more affordable to the homeowner. However, if this is not approved or is not done, then foreclosure is the next step. The time to begin the short sale process is after the loan modification has been declined but BEFORE the pre-foreclosure period expires, if at all possible. In many states, this pre-foreclosure period begins with a Notice of Default (NOD); the terminology may be different in your state.