Home prices that have decreased to less than the principal due on the mortgage are given rise to an alternative method to stop foreclosures. This option can help people get out of homes that they can no longer afford or pay the mortgage on. The alternative is called a short sale.
A few years ago, when the economy was stronger and when home prices were rising fairly rapidly, people who fell behind on their mortgage, or lost a job, they could sell their home and moved on to something they could afford. Now, rapidly declining home values mean that many families can't sell their house for enough to pay off the mortgage. In these cases, what is called a short sale is an attractive alternative.
When you sell your home, the mortgage lender will agree to accept less than the current mortgage balance as payment in full for the outstanding loan. This will generally agree to this because it's a less costly route for the lender than the foreclosure process. While both a short sale and a foreclosure will result in losses for the lender, with a foreclosure the lender now owns the home, has more risk, and they now have the added costs of both maintaining, owning, and selling homes. For the homeowner, short sales help the homeowner by, among other things, they do not have to face the embarrassment of eviction and foreclosure.
More banks and lenders are offering struggling borrowers this option. It allows the borrower to refinance their current loan into a new mortgage. So instead of the home being sold by the homeowner or bank, the existing loan will be refinanced with a new lender, thereby reducing the principal balance and lowering the monthly payment. Read more on the short sale refinance option.
Yes, but by how much depends. While a short sale will damage a person's credit score, Fair Issacs, who is the “keeper” of the widely used FICO credit score rating system, says the impact to someone’s credit score depends on other factors as well, such as the composition of the individual's credit profile, status of other bills and debts, and more. Find out how to improve credit ratings.
Wells Fargo, which recently acquired Charlotte's Wachovia, is one of the nation's largest mortgage lenders and servicers and is a major player in the real estate market. Wells Fargo’s approved short sales have tripled in the last one and a half years as home prices have declined as unemployment has risen. Find other Wells Fargo mortgage help. More.
Short sales usually are not well publicized, so it is hard to get an accurate count. Unlike foreclosures, there also are no standard or consistent reporting of short sales in public records. However, Realtors across the country say they've seen an increase in their local markets. Unexpected bills, job loss, unexpected job transfers, all combined with falling home prices are the primary drivers of short sales. Many lenders are also experiencing benefits by offering this alternative.
One unofficial study says that nationwide, short sales are up about 20 percent in the past six months. But that number may be low. This number is based on figures collected from mortgage servicers by a multi state foreclosure prevention group Pearce.
They do now. The federal government has unveiled a plan that will help homeowners through the short sale process. It encourages, and rewards, both lenders and homeowners to participate in this program by provided cash incentives and other assistance. Read more on the government short sale program.
One of the big drawbacks to short sales is the added red tape means that closing a deal can take months, which is sometimes becoming a potential turnoff for buyers, sellers, and even the real estate agents. However the process is become more streamlines and is starting to quicken, Find other ways to delay a foreclosure filing. More.
Short sales take longer to close because everyone being short changed and potentially losing money must approve the deals. Some of the parties impacted include the mortgage holder, investors, banks, and others with liens such as home equity loans. Sometimes it can even be difficult to identify all of these organizations. These different parties may need to negotiate among themselves on how much of the loss each party will accept to close the deal, which also slows down the process.
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