How to Use a Short Sale to Avoid Foreclosure

Homeowners who have looked into various methods to stop the foreclosure process and have not found success should begin to think about selling their homes. Sometimes the best alternative to foreclosure is to give up the property and begin planning for their future financial lives, especially if it will be too expensive to find some method of preventing the loss of the home. Losing the home is obviously a stressful situation, but using a short term "band-aid" and holding onto a house that will only be kept out of foreclosure for a couple more weeks or months before being auctioned off is the worst possible solution. But even selling the property outright may not work, if the mortgage on the property is more than the house can be sold for. In this case, a short sale may be the best option.

First, though, foreclosure victims who wish to keep their homes should take every opportunity available to prevent the loss of the home. If they are intent on stopping foreclosure, then there are numerous options to fight the bank that may be appropriate. Selling the property, though, is a much better alternative to being forcefully evicted by the county sheriff during the foreclosure legal process. But once borrowers have attempted every alternative that they are qualified for, it may be best to move on and just sell the house with a short sale.

The most common way to sell a property is by hiring a local Realtor with low fees who understands the process of short sales. Homeowners can also list their property on their own. Either way, commissions can be kept as low as reasonable, allowing for a more agreeable selling price and for the borrowers to keep as much of the proceeds as they can for use in paying off the mortgage. Selling the house and ending up with even a small amount of the equity is a better solution than listing the house for too expensive of a price, not being able to sell, and seeing the lender sell the property at a foreclosure auction. When this occurs, the borrowers usually end up with nothing, as the house will not auction for an amount that will pay off the amount of the foreclosure judgment.

If the borrowers decide to sell their, the mortgage company may allow them extra time to locate a buyer. It is important to communicate with the lender once all other options have been tried, so that the bank can delay a sheriff sale or hold off on any other legal proceedings. Mortgage companies are more interested in getting the loan paid in full, and it is in their interest to allow for extra time to sell a property on the local real estate market. If the house was taken to sheriff sale and the bank was the winner at auction, they would end up listing the house anyway, after the eviction had been conducted. The borrowers listing the home while they are still the owners may cut down the time that the bank has to deal with the property, as well as ensure their loan is paid in full or for an acceptable amount.

Many times, however, foreclosed homes do not have adequate time to sit on the market for months with an asking price close to the market value of the home. This is one reason why lenders will agree to short sales in many situations. A short sale is an agreement whereby the mortgage company accepts less than the total owed on the loan. They are usually approved if the value of the house has declined, and there is no chance the sellers would be able to find a buyer to pay higher than the market value. Even in instances where the loan is not higher than the value, banks may consider a short sale, because there is a big chance of them losing even more money if the house has to be auctioned at sheriff sale and then sits on the market for a long period of time.

Homeowners who try to get a short sale and find a buyer need to know that they will probably end up with no proceeds from the sale. Other than the foreclosure being stopped and being able to make a clean break with the bank, there is little other benefit to a short sale. The lender will definitely not want the homeowners to get any type of financial benefit beyond a few hundred or a thousand dollars for moving expenses. Moreover, any debt that the bank forgives (the difference between what the homeowners owe and what the bank accepts as a final payoff) is counted as taxable income by the IRS. This means that the borrowers may have an extra tax liability at the end of the year because they took advantage of a short sale.

In many cases, a short sale can be a great solution for borrowers who have attempted numerous options to stop foreclosure and have been unable to save their homes. It provides a solution even when selling the property for what is owed is not possible. The bank can actually accept less than what is owed and help the homeowners get rid of the house and avoid a full foreclosure. But the drawbacks of the short sale should also be thought out; namely, that the foreclosure victims will not be able to benefit economically from the sale, and they may even have a tax liability with the IRS. However, when the mortgage company is willing to negotiate with the borrowers, a short sale is a much better solution than being evicted from the property.