Foreclosure: What Is a Short Sale?

By Francine L. Huff
Mortgage Credit Problems Columnist

Many homeowners are desperate to unload their homes because they can't keep up with their mortgage payments. Many of these people owe more on their mortgage than their house is currently worth and have poor credit so refinancing isn't an option. If you're in that situation, a short sale may be the last resort for avoiding foreclosure.

Who Can Qualify?

A short sale occurs when a lender agrees to accept less than the balance due on a mortgage because a homeowner is in financial distress. Lenders won't approve a short sale in all cases. But if you have poor credit and aren't able to refinance and are behind on your monthly payments, you could be a candidate for this type of deal. You'll probably have to provide proof that you lost your job, have huge medical bills, got divorced, or suffered some other financial hardship.

A Slow Process

Distressed homeowners with poor credit and other financial woes are still responsible for their mortgage payments while waiting for a short sale to be approved, which can take months. Lenders often make everyone involved wait until there are several offers to go through and compare. And if you have a second mortgage or home equity loan the process could be held up even longer if the different lenders don't agree on the terms of a deal. Also, if you try to sell your home too far below the current market value, your lender probably won't accept the offer.

Who Can Buy a Short Sale?

About 20% of U.S. home sales in March 2008 were short sales, according to an Inside Mortgage Finance survey. But not everyone who proposes to buy a house in a short sale will be approved. Buyers must still qualify for a loan and make a down payment.

Even if a seller agrees to a short sale, the deal must be approved by their lender. If you plan to buy a short sale here are three things you must do:

• When you make an offer for the home, include a contingency that the short sale be approved by the buyer's lender.
• Even though many short sales are sold "as is" you should still do a home inspection to know what repairs are needed.
• Request proof that the seller has sent in the required hardship letter and other documentation to the lender.

Buyers are scooping up real estate bargains in short sales all across the country. But these deals aren't always a bargain so it's important to find a real estate agent and attorney who are familiar with short sales to advise you.

Sources:

• Los Angeles Times
• "Short sales: A tough road," by Diane Wedner, www.latimes.com.
• MSNBC
• "As housing falls, short sales becoming common," by Jane Hodges, www.msnbc.msn.com.

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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