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Understanding How Short Sales Work and How it can Prevent a Foreclosure


The news is full of reports of rising foreclosure rates around the country. While short sales have received less coverage in the media, they are also on the rise as homeowners seek alternatives to foreclosures and the effects foreclosures can have on their future credit. Short sales are special opportunities that make it possible for homeowners to reduce the amount of financial impact they experience when they default on a home loan. It is important to keep in mind that in order to take advantage of the benefits offered by a short sale, the lender must provide approval and that is not always an easy task. It takes perseverance and patience.

Most lenders today follow similar protocols for short sales, but every lender is different and the process can vary somewhat. There are two basic standards that most lenders will follow. First, the property involved in a short sale will be sold for less than the amount that is owed on the mortgage. Second, in order to qualify for a short sale, the involved property must not have already entered the foreclosure process. If you want to take advantage of a foreclosure, it is imperative that you take action before the home actually goes into foreclosure.

Borrowers absolutely must take a proactive stance in making contact with their lender when they recognize they are no longer able to afford to make their mortgage payments. Owners who procrastinate may very well find themselves in a position where they miss out on the opportunity to avoid foreclosure and benefit from a short sale. As a result, you might find that you have no choice but to be subjected to the financial effects that can result from a foreclosure for many years to come.

In order to qualify for a short sale, be aware that you will also need to demonstrate that you are truly in a difficult financial situation. Usually, this means you will need to prove that you owe more on the home than what it is worth. Short sales are usually handled through the loss mitigation department of the lender that holds the mortgage. The loss mitigator will act as a mediator and will be responsible for working with the homeowner through the sales process.

Lenders may offer homeowners options that can make it possible for them to remain in the home before they agree to enter a contract for a short sale. Such options might include mortgage refinance, loan modifications, forbearance agreements or deferred payments. It should be kept in mind that even with a short sale banks will usually incur a financial loss. Therefore, short sales are only offered when all other solutions have been exhausted or do not exist.

Borrowers will usually be required to provide financial records once a short sale option has been presented. These documents can include tax returns, wage statements, bank statements and a detailed list for expenses and income. The bank may also require information related to assets and financial portfolios. Furthermore, the borrower may also be required to submit a hardship letter that details the circumstances that resulted in the financial difficulty. Hardship letters can be extremely important and can even make or break a short sale, so a concise and well-written letter is imperative.

When writing a hardship letter, it is important to remember that a real human will read it. Present your story in a way that someone else can relate to it, but avoid sounding like a victim. Include information regarding steps you have taken to overcome the financial challenges that caused the problem. Banks will usually be more willing to work with persons who are taking steps to overcome their problems.

Be certain you have everything in order and have provided all requested documents. This can make the difference between having your short sale approved and having it denied.

Once the short sale has been approved, the next step in the process will be to sell the property. In most cases, lenders will require that borrowers locate a qualified buyer for the property before approval will be granted for the short sale. Other lenders may agree for the property to be listed through a realtor. Prospective buyers for short sale properties will usually need to obtain preapproved financing, unless they are buying with cash.

Finally, make a point to find out from the lender whether you will be held responsible for any difference between the amount owed on the mortgage and the sales price. It can take years to repay such a difference and can significantly impact your financial future, so do not overlook this important point.


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