A short sale occurs only when the mortgage on a house exceeds the home’s worth and, through the sale process, the creditor takes less than what it is owed. Prior to the housing recession, short sales were rare because housing costs were constantly on the upswing. In amounts, short sales rose from below 5,000 from the first quarter of 2008 to over 20,000 in the second quarter of 2009.
Lenders don’t enjoy sales. A foreclosure may be expensive for them, but when the economy rebounds before they resell, they have an opportunity to make back what they’re owed. And also the more short earnings a creditor approves, the greater it may be generating: more houses go on the market, costs go down, more houses end up worth less than their own loans. If a creditor denies a short sale, there’s always the chance the borrower may decide to stick it out and continue making loan payments until the market turns out. These problems have led to creditors requiring a debtor to prove”hardship” before approving a short sale. Acceptable hardships include sickness, divorce and job loss–events that make it impossible for the debtor to make payments. A loan worth over a home is itself not a hardship. People who earn enough cash to cover their mortgage but simply don’t want to since the home is worth less than the loan will likely be out of luck.
Just because a creditor approves a short sale, that alone doesn’t free the vendor from the mortgage balance debt. Unless the sales contract or another document signed by the creditor releases the debtor from loan repayment, then the creditor can go after the vendor to the remainder of their mortgage. On the other hand, in certain states a foreclosure automatically releases the debtor from the debt. If you’re in a country with”no recourse” with foreclosures, don’t agree to a short sale unless your creditor releases you out of your loan obligation. In some countries it also depends on the loan itself. Back in California, for instance, a loan used to buy the home is a no-recourse loan, however a refinance or home equity loan taken out after the purchase is not.
A normal real estate transaction runs between one and five times out of offer to signed contract and a second 30 to 45 to close. A short sale can run months prior to the lender responds to the initial offer. If more than one creditor is concerned, the lag period increases. Some lenders are better than others. Before you think about buying through a short sale request your real estate agent what lenders or lender are involved and what their response time is like. If you’re a potential short sale vendor, see whether your lender participates in and you qualify for HAFA, the Home Affordable Foreclosures Program. This government-sponsored application reduces creditor response times during short sales and keeps creditors to deadlines.