When a homeowner cannot pay their mortgage, the lender has a few options. One of these is foreclosure, where the lender reclaims the home and sells it to a third party. This process requires the current homeowner to vacate the property and can take months to complete.
Another option is for the lender and homeowner to negotiate a short sale. This involves selling the home for less than the value of the loan. But why might this be a more profitable and appealing option for the lender compared to foreclosure?
The property may be in better condition
Foreclosed properties are often in poor condition by the time the bank takes ownership, which can reduce the eventual sale price. In contrast, a home sold through a short sale is often in excellent condition, as the homeowner is simply unable to afford the loan but has maintained the property.
A short sale can be faster
Short sales typically happen more quickly. While lenders, sellers and buyers must negotiate the sale price, foreclosure is a much longer process. The lender cannot begin foreclosure until the owner has missed multiple payments, which takes months. After that, the lender has to repossess the property, address any issues, and put it on the market. In comparison, a short sale can save time and money, potentially resulting in a better financial outcome for the lender.
The owner is motivated
Homeowners often push back against foreclosure proceedings, trying to hold onto their home. However, when a short sale is an option, they may view it as a way to reduce their financial liabilities. Their willingness to cooperate can streamline the process and make it more efficient.
Both short sales and foreclosures allow lenders to recover as much of the loan amount as possible. It’s essential for everyone involved to carefully weigh the pros and cons and follow the proper legal steps.