For homeowners who can no longer afford their mortgage payments, arranging a short sale is far preferable to losing their home in a foreclosure. A short sale can help protect your credit history and give you the time and resources to make other living arrangements, providing a smoother transition to your next residence. Fortunately, lenders also prefer to negotiate a short sale with a homeowner who is in arrears because a short sale will minimize the lender’s loss on the mortgage loan.
In a foreclosure scenario, the bank not only takes a significant loss on the loan itself but is also required to pay the legal fees to foreclose. These fees will vary for every house and every bank but are reportedly between $5000 and $10,000. In addition, after a foreclosure the bank owns the house, which means it is responsible for the upkeep and maintenance. The lender is required to pay utilities, property taxes, HOA fees, and other costs associated with maintaining the home and may have to carry these costs for 6 – 12 months before it is able to sell the house.
Moreover, if the original mortgage was an FHA loan, the bank is responsible for bringing the property up to FHA lending standards. That means if the house has problems, such as a bad roof or leaky plumbing, the bank is responsible for completing all repairs – and will rack up even more expenditures before it can resell the home. Many cities also require banks to maintain foreclosed homes up to community standards and will place on a lien on the lender to cover city maintenance costs, if necessary.
Finally, banks are penalized for foreclosures. When a loan is in default, federal regulations require lending institutions to hold back three times the value of the loan in reserve. The bank cannot lend that money out until the house is off the books. For example, if a bank has $10 million to lend out in mortgages and has foreclosed on a $200,000 house, the bank must hold $600,000 ($200,000 x 3) in reserve. The bank cannot lend out that money until the house has been sold, which means it loses the interest that could be earned on those new loans.
The bottom line is that a short sale is a much better deal for the bank. The lender is able to get the mortgage off the books faster, take less of a loss, and avoid holding the house or dealing with any property problems. When your realtor negotiates a short sale on your behalf, the bank will still be very aggressive on pricing, trying to recoup as much as the original mortgage as possible. The house will be sold at a discount, but the bank is not going to give it away. Even so, if the other option is a foreclosure, a short sale is a much better solution for all parties.
If you are behind on your mortgage and concerned about foreclosure, we are happy to answer any questions about the short sale process. Please contact our office for assistance.