With the real estate bust that hit pretty hard across the nation around 7 years ago, a lot of the rules changed. Subsequently, banks have made it easier for loan holders to avoid foreclosure and save their credit in the event of financial hardships.
Many new ‘life rafts’ were introduced in recent years. And though not an entirely new concept, short sales were increasingly offered as an option to those looking to save their credit and get out from under their mortgages on properties no longer worth their value. They were made more available in the heat of the real estate bust basically because they had little other option.
A short sale on a property is a settlement in which the bank agrees to take a lesser payment from the homeowner upon sale to satisfy the mortgage. The though full effects have slowly diminished and we’re no longer near the rock bottom, during the brunt of the bust when prices dropped out, banks were forced accept more and more terms such as these.
Banks had little other choice than to offer the short sale option because it was either that or take ownership of thousands of abandoned homes. And with ownership, comes maintenance, upkeep and security costs, totaling upwards of a thousand dollars a month for each property. Considering the insurmountable number of properties many homeowners foreclosed on and subsequently abandoned, these costs were no marginal sum, even for a bank.
As homes flooded the market on pure speculation, especially in boom towns throughout the Sunbelt, and unqualified buyers began to fall behind on payments, the perfect storm was brewing. With an oversaturation of available real estate, prices plummeted overnight. Homeowners were finding they owed upward of $200,000 more on their mortgage than their home was worth. And these are the market qualified for the short sale scenario.
Allowing the bank to retrieve even a fraction of what a home is worth is better than being forced to own and upkeep properties. Not only short sales wash the banks hands of the property, but it also allows them to salvage a piece of their investment. In addition, the seller can walk away free and clear from the sale – even if it comes up thousands of dollars less than they owed, with undamaged credit. Bankruptcy, on the other hand, will leave a nasty scar on a credit report for nearly a decade.