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Just because your home has fallen in value since you bought it and you feel it is a waste of money to pay for a declining asset does not qualify you for a short sale. In order for the borrower to be eligible for an approval from the lender for a short sale, there has to be a financial hardship. Likewise, foreclosure on the property appears likely. If a borrower has sufficient assets to pay for his/her mortgage, then a lender will not likely approve a short sale. Once all paperwork has been submitted and it has been determined that the borrower can qualify for a short sale then the property is listed for sale to potential buyers. Now the property owner can accept bids to purchase the property. Typically these offers from the prospective buyers will be lower than the fair market value of the property. Offers on the property can be accepted or rejected by the borrower. Once an offer is accepted by the borrower, it is sent to the mortgage lender for approval. At this stage, the lender reviews the hardship of the borrower, reviews the borrower's financial documents and determines acceptance of the amount derived from the sale of the property. Keep in mind that the mortgage lender is not approving the sale of the house. The lender is only acknowledging that the receipt from the property sale will be applied to settle the outstanding mortgage on the property.

What are the Consequences of a Short Sale for the Borrower?

The borrower will be affected by the short sale no doubt. No one can realistically expect to walk away with no ramifications. Foreclosure of the home would carry heavier consequences than a short sale.

Some of the more pertinent effects of a short sale on a borrower are: 1. An impact on a credit score of about 80 to 100 points 2. A 2 year wait before a borrower can obtain another mortgage 3. A possible deficiency judgment from the lender although this can usually be negotiated away with a professional negotiator. 4. Tax consequences for an investor property. Primary residences are exempt for debt forgiveness.

Why Would A Bank Accept a Short Sale?

No mortgage lender wants to hold homes. This is not their business and they want to avoid possible foreclosures. A lender is apprehensive of a foreclosure because of the financial limitation placed on its assets. A foreclosure could carry costs upwards of $30,000. If the property becomes bank owned or an REO, then up to 6 times the value of the REO has to be held in cash reserves. This restricts the use of these monies, not allowing for better investments. One of the first jobs of an REO Officer is to liquidate properties acquired by foreclosure. Therefore, it is truly in the best interest of the lender to work out a short sale where permitted as opposed to going thru the foreclosure process.

What are Some Drawbacks When Buying a Short Sale ?

Routinely short sales are much slower being approved as compared to regular sales. The lender needs to approve the offered sum for debt liquidation and this can be a long process. While the buyer can get a significant cost saving from the new home there are drawbacks. The approval process from the lender can be very long and frustrating. Other issues accompany the short sale. - Even with short sale approved properties, banks and lenders can still reject offers from buyers. Some of these causes could be buyer qualification, appraised value showing a large variance between offer price and appraised value, etc. Having an educated agent help buyers with the short sale process is important to make the transaction move forward toward a purchase.