WHAT IS A SHORT SALE?
You have several options if you have to sell, we will discuss one first called a “short sale”.
A short sale is a transaction in which a lender allows you to sell your home for less than what is owed on it. The bank accepts less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan. A lender may accept a short sale when you, the borrower, is in severe financial straits and market conditions make a short sale the best choice to mitigate the lender’s damages. Like a deed in lieu of foreclosure, this saves the lender the costs of foreclosure and the borrower avoids having a foreclosure on his or her credit report.
Why would a lender agree to accept a short sale?
Lenders may have ample incentive to negotiate a short sale with a distressed borrower. For example, should the lender take back a property pursuant to a foreclosure sale, the lender would become responsible for a variety of costs, including property maintenance, utilities, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.
A lender will typically evaluate the financial situation of the borrower as well as current market conditions to determine whether or not to agree to a short sale. It is really a business decision for the lender to determine whether it would receive more money by accepting the short sale, or completing a foreclosure, reselling the property, and pursuing personal liability (i.e., deficiency judgment against the borrower and/or claims against guarantors, for loans on which those remedies are available.) In California, there are laws that protect home owners from banks pursuing a deficiency balance in most cases.
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