Foreclosure Vs. Short-Selling

13 04 2010

On April 5th, the U.S. Government began an incentive progame encouraging lenders to approve more Short Sales of homes. They will receive $1,500 per short sale for participating in what is called the, “Home Affordable Foreclosure Alternatives” program. Borrowers will receive $3,000 as a “relocation incentive”.

So, what is a Short Sale?
A Short Sale is when a home is sold for less than what is owed on it. For the most part, when a Short Sale occurs, the borrower may still owe the difference.

What exactly is a Foreclosure?
According to a foreclosure is: to deprive (a mortgagor or pledgor) of the right to redeem his or her property, esp. on failure to make payment on a mortgage when due, ownership of property then passing to the mortgagee.
In other words, a borrower could no longer make payments on a mortgage, so the lender becomes the owner.

So what should an owner who CANNOT make their mortgage payments do?

Well, Lenders are starting to realize that if the approval for Short Selling becomes more “user friendly” then — although they will still lose money, it will be less then the amount that they would lose on a Foreclosure.

For example: Say you have a $100,000 mortgage and are not able to make the payments. If you choose to Foreclose, your credit score sinks and the Lender will be out $100K. They can auction the property, but even if they sell it for $50,000 that is a loss of $50K for them. On the other hand if they approve you to Short Sale the property, your credit score will still suffer (but not nearly as much). And again, the Lender will also lose here. But say the property short-sells for $75K; their loss is now only $25K versus $50K.

The bottom line is that neither one is a great scenario, but a Short Sale could be the lesser of two evils for someone who really cannot afford their mortgage anymore. And with the Government promoting this option through new incentives, its popularity will certainly rise.





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