A quick glance at recent data shows that the number of homes that end up in foreclosure is declining across the country. A more stable economy and job market have allowed many borrowers who are behind on their payments to catch up on their past due amounts. Others have been able to take advantage of the near record low mortgage rates and refinance or get a loan modification. While it is true that the housing market is beginning to show signs of recovery, something else might also be at play as to why we are seeing the number of foreclosures drop – the short sale.
More homeowners who have defaulted on their loans and are at risk of losing their homes are opting for a short sale instead of a foreclosure. A short sale is when the homeowner sells their home for less than what they owe on the mortgage, and the bank typically eats the difference. Short sales used to be rare, but recent statistics show that as foreclosures have become less prevalent, short sales have simultaneously become more common.
So, why the shift in philosophy among homeowners, lenders, and real estate agents? Here are the top 3 reasons why we think short sales are so popular these days:
1. Quicker turnaround
Before a lender can foreclose on a borrower and seize the home, there are many steps they have to follow. All of these steps can be time consuming, and depending on the state where the foreclosure is taking place, court hearings are sometimes required. The federal government is already investigating illegal and immoral practices by many of the largest lenders during foreclosures that took place over the last five years, so banks don't want to break any additional laws or raise any more red flags. Therefore, they are following every rule and making sure everything is done according to the books. In some states, foreclosure proceedings are so backlogged at the court level that it is taking more than three years for a foreclosure to go through the system! But with a short sale, the whole process is much quicker. First, the lender has to agree that the homeowner can avoid foreclosure by selling through a short sale.
Then, once a prospective buyer makes an offer on the home, the lender has to agree to that price. If the parties come to an agreement, the house is sold, and essentially, the transaction is complete.
2. Less paperwork
Because the court systems aren't usually involved in a short sale, there is less paperwork that is required. Yes, all parties (the buyer, the seller, the lender, and real estate agents) still have to fill out forms and legal documents, but a short sale doesn't typically require any more paperwork than a traditional home sale. Less paperwork means fewer headaches, less red tape, and an overall quicker transaction.
3. Lenders are more willing to go this route
In the past, lenders looked at all distressed properties the same. But after the housing crisis, many banks have wised up and now realize it's better to allow a homeowner to sell their home through a short sale than deal with the hassle of a foreclosure. Do lenders lose money on a short sale? Absolutely. If the homeowner owes $200,000 on their mortgage, but only gets $150,000 for the property through a short sale, the banks would rather eat the other $50,000 than have to spend time and money dealing with a foreclosure.
Plus, short sales don't usually have legal fees attached to them, so in the banks eyes, the faster they can cut their losses, the better.
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