Key facts about bank short sales

"A bank short sale is an arrangement between a homeowner and a bank to sell the home for less than the unpaid balance, and usually to get the difference waived by the lender. It is one of the most common forms of loss mitigation, or a way to avoid foreclosure, for borrowers who are no longer able to keep up with mortgage payments and do not qualify for other alternatives. Below are some key facts about bank short sales that may help you decide if it’s your best bet against foreclosure.Short Sales Reduce Credit Damage.Some people don’t see the point in doing a bank short sale when they don’t get to keep their homes. What makes short sales different is that they don’t damage your credit as much, although there will still be some credit effects. To give you an idea, a foreclosure causes one’s credit score to drop by about 250 to 400 points, while a bank short sale will reduce your score by 80 to 250 on average. The actual difference will depend on your situation, of course, but in general, short sales are far less damaging.Not Everyone Qualifies For A Short Sale.The best candidates for a bank short sale are homeowners whose properties have fallen in value and can no longer sell for enough to pay their balance. Basically, this means their equity is below zero. Since refinancing isn’t an option and there’s no incentive for the bank to modify the loan, a bank short sale is usually the only option in such cases. It is possible to sell a home short while it still has equity, but most banks now have policies requiring borrowers to be “underwater” and/or be at least 60 days behind for a short sale.Banks Benefit From Short Sales Too.Lenders usually have good reason to accept a bank short sale, especially when a borrower is already on the way to foreclosure. This is because the losses they incur in a bank short sale are often far less than if they foreclosed instead. Of course, this depends on how much the borrower owes and how much the home sells for—and sometimes, the losses are pretty much equal. But on average, a bank short sale will cost a bank 20% less than a foreclosure, not to mention less processing time.Government Supports Short Sales.The Home Affordable Foreclosure Alternative (HAFA) was launched in April 2010 to give borrowers a bank short sale option when other workout programs, such as the Home Affordable Modification Plan (HAMP), do not work out. HAFA gives lenders and borrowers incentives to do a bank short sale, and sets an organized process to avoid delays and ensure timely responses from both parties. If your lender is part of the HAFA program, see if you qualify before trying other solutions."