Mortgage foreclosure is something that isn't advantageous to have glaring at you from a credit report. It has a large negative impact on FICO's computations and can make future credit very costly to obtain, if it's available at all. Before a distressed homeowner resorts to that route, another option has increasingly made its way into the realm of possible solutions.
A short sale. Under this arrangement the homeowner sells the house for less than the mortgage balance, with the lender's full blessing. At first sight it seems to be the ideal way to go. The borrower, or homeowner, is clear of his unmanageable obligation, the lender avoids a costly foreclosure and the property's buyer is likely to get a nice deal on the home.
But the reality can be much different. Many participants, real estate agents, sellers, buyers, lenders and others, can testify to that. The conditions that allow a short sale to proceed are varied and need to be met.
The borrower must prove that he honestly cannot make the required mortgage payments. The house's value is critical to the lender's assessment whether the sale is approved. The loan servicer, or lender, wants to assure the deal is "arm's length" and not something done between friends or relatives at discounted pricing and soft terms. Does the new buyer qualify for a mortgage to make the purchase stick? Another condition there. If a second mortgage or a home equity line of credit is involved, will its holder go along? There is more. The investor who has the home loan in its portfolio has to be convinced that a short sale is in its best interest.
These are some of the more obvious reasons complicating and slowing down the process. And then there is the one that makes you scratch behind your left ear. Many lenders are just plain short-staffed to handle the current work load.
According to the assessment of Molly Kay Hamrick at Coldwell Banker Premier Realty in Las Vegas merely about 20% of short-sale bids in town will end up closing and funded. And to get all the way to the end takes a long time.