When the economic climate turns frosty, credit begins to dry up, and banks or other lending institutions begin to call in past due loans and mortgages, many individuals begin to realize that they have over extended themselves financially and find that they cannot pay back their financial commitments; however, banks cannot accept the reality of losing the entirety of a loan or mortgage and therefore pursue and initiate a bank short sale. A short sale is a method which banks use to recoup at least part of a defaulted loan or mortgage. In this process a sale is approved even if the value of the home or other property has depreciated to such a point that revenue generated from the sale of said property will not cover the value of the defaulted loan. The bank approves this type of sale because, while not regaining the entirety of the mortgage, the bank will recoup a least a portion of the owed money through the sale of the property.
Due to any number of reasons an individual debtor may begin to fall behind on his or her mortgage or loan payments. These reasons could include a personal injury that does not allow them to work, the loss of employment, or the inevitability of unforeseen expenses. When the economy begins to trend downward, then the number of people who find themselves under financial stress increases dramatically. Since the number of people who feel this pressure increases, the number of people who begin to fall behind on their mortgages also increases. When a home owner has fallen so far behind on their payments that the lending institution begins to worry that the debtor may have over extended themselves financially, then the lending institution may threaten to foreclose on the property.
A bank short sale cannot take place once the foreclosure process has been begun. Therefore, if a bank begins this process in earnest, then a short sale will be impossible. For many reasons, including the cost associated with a foreclosure and the complicated legal paperwork involved, banks will try to avoid foreclosing on a home at all costs. For this reason a bank will at least entertain the idea of a short sale given the right situation and circumstances.
These circumstances are largely dependent on the relative market value of the property in question. In most cases, unlike an automobile, a home steadily increases in value over time. This can be due to a number of reasons including an improvement in the surrounding community, improvements in the housing market, or improvements in the home. However, sometimes, especially when the housing market begins to decline, the value of a home can depreciate as a car does once you drive it off of the dealer’s lot. When this happens a bank is put in a tough situation. When a house increases in value they are guaranteed a return on their loan because the sale of the home will more than cover the value of the mortgage. However, when a home depreciates, the sale of the home may not account for the entirety of the mortgage.
A bank short sale is pursued when a home has depreciated to such a point that the sale of the property will not cover the value of the initial loan. This process at least guarantees that the entirety of the loan is not lost.
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