Can a "short sale" help me?

HLN Money Expert Clark Howard.

Clark Behind The Headlines
From HLN's Money Expert Clark Howard

“Short sale” is a term that no one had heard of 18 months ago. And, even today, it’s very misunderstood.

A short sale is where I own a home, and  I owe more on it than what it’s worth.  I need to get out and I don’t want to be foreclosed on.  So I ask my lender if I can market the house as a short sale, meaning that the price of the home is marked to market. The bank then takes a hit on the loss between what the mortgage is and what the market is today.

Now, are banks running charities?  No way!  The reason why a bank would do a short sale is that it’s much cheaper for them than a foreclosure.  The costs of foreclosures are much greater for the bank because, ultimately, they get less than what they’d get on a short sale, and they end up with enormous costs going through the foreclosure process and the aftermath.  So it sounds like it would be a logical thing to do in a marketplace where people who bought at peak with 100% financing are now so far upside down.

What has changed is the federal government is now subsidizing the banks to allow short sales to go through. The feds are eating some of the losses as an incentive to try to get the banks to do something that’s better for them anyway from a business stand point, which is to cut a deal with people short of foreclosure.  For the seller, it’s a deal because you get out with the shirt still on your back and you didn’t suffer foreclosure.  Your credit score does suffer in a short sale but not as much as it would with a foreclosure.  Quite often, foreclosures lead to bankruptcies, which devastate your credit standing.

So the short sale thing is starting to flip.  It doesn’t mean that every lender has it together.  The biggest lenders have set up the equivalent of war rooms with specialists whose job it is to process these.  Some of the big lenders now take short sale request electronically rather than give that phrase we kept hearing: “Oh, the paperwork is lost”.  So as someone who has long derided short sales, I want to tell you they’re back in the game if you’re looking for a distressed piece of real estate.