When a home mortgage enters default, many homeowners quickly believe they're running out of viable options. Until the bank holding the mortgage decides to take the homeowner through the foreclosure process, however, the indebted homeowner can pursue a short sale to solve the situation. In a short sale, the homeowner finds a buyer for the property who will purchase it at a price to which the bank will agree. Often, this amount is less than the total amount outstanding on the mortgage. Even though they accept less money, a short sale often benefits the bank more than foreclosure could.
Avoiding Foreclosure
The top benefit of a short sale for both the indebted homeowner and the bank holding the homeowner's mortgage is avoiding the foreclosure process entirely. For banks, this means saving possibly thousands of dollars in court fees and property maintenance if the home isn't sold at auction. The foreclosure process is also very time consuming, so banks will often accept a short sale even when they receive less than the total debt due.
Recoup Money
Banks are also able to recoup at least some of the money that they are owed through a short sale. Although the foreclosure process includes a public auction, the property may sell at a much lower price or may not be sold and remain as a bank-owned property. Rather than let this happen, banks will often accept less than the full outstanding debt owed to complete the sale. Settling for less than the full cost of the debt is another benefit of a short sale to a homeowner.
Reserve Funds
Banks will also agree to a short sale to keep bank reserve funds free and available for other bank operations. While a mortgage is outstanding, a bank must keep enough money in a reserve fund to cover the loan in the case that the bank cannot recoup the mortgage during foreclosure proceedings. Banks must also keep reserve money on hand for real estate owned, or REO, properties, which is what a property in default becomes if it reaches public auction during foreclosure and doesn't sell.
Less Credit Damage
A short sale is still reported as a negative factor on an individual's credit report, thus lowering that person's credit score, but it deals less damage to that person's score than a foreclosure or just leaving the account in default would. Whereas a foreclosure can lower your credit score from 250 to 280 points, a short sale would end up deducting from 80 to 150 points from your credit score. A homeowner who completes a short sale may receive reasonable rates on a new mortgage within 24 months, while a homeowner who went through foreclosure may have to wait 36 months or longer to receive reasonable mortgage rates.
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