Short Sale to Avoid Foreclosure
To avoid the time and costs involved with a foreclosure process, some lenders may approve a short sale of the mortgage property by the borrower themselves, under certain conditions.
The short sale option can be explored when the borrower has defaulted on their payments and their mortgage property is about to be foreclosed or it can also be initiated by the buyer when they know that they are going to default on their loan in the future, even while being current on their payments at present.
Some banks consider a short sale application even after a foreclosure notice is filed. A borrower can get another 2-3 months time before the foreclosure even if their short sale application is rejected.
To obtain a short sale clearance, borrowers need to present their case to the banks with a hardship letter and other financial documents that prove that they are in financial difficulty and are finding it difficult to repay the mortgage payments. It should also include the documents required to convince the lender that they can pay up all dues by doing a short sale by themselves.
Banks, on their part consider the hardship letter, conduct a proper appraisal of the property involved through multiple sources including the local brokers before approving the short sale. The short sale may or may not be approved and the decision is left to the bank. The short sale approval process often takes a few weeks to few months and multiple levels of approvals.
To avoid the delays and costs of the foreclosure process, banks may approve the short sale at a slightly lesser price than the total amount owed to them by the borrower, especially if the property has got a low appraisal value.
The advantages to the borrower are evident – They are in control of the sale of their house, they can decide to sell their house to a known party / acquaintance, they can avoid the glitch on their social status due to the foreclosure notices in public places and newspapers, decreased reduction in their credit score (compared to a foreclosure), etc.
But the borrower has the responsibility of finding the right buyer if the short sale is approved and the sale happens like any other property sale.
Some external firms may provide consultancy to the borrower to help them represent their case and negotiate a short sale from their bank, for a modest fee.