There are a number of things to consider when purchasing a home. Usually homeowners have to take out a large mortgage and are required to make monthly payments back to the lender. If the homeowner cannot pay those payments, then the home can literally be seized and taken away from the homeowner.
In 2007 a market crash happened in real estate. This caused a lot of defaulted payments on mortgages. This, in turn, caused foreclosures on homes.
A main reason for so many defaulted payments was because when borrowers were having a hard time making payments they had very slim changes of being able to repay it. The only option was refinancing the home with a lower interest rate, which many mortgage lenders were not willing to do because of so many foreclosed homes.
Another reason was that before the 2007 crash the real estate market was in an up market. When a homeowner ran in to trouble with paying the mortgage bill, the next step is to sell the home and downgrade. Unfortunately, the homeowners could not make any form of profit when selling their home because of the market crash. Since they were already struggling in the first place, this made it an even more impossible scenario.
As home prices decreased, interest rates increased. It increased so much that foreclosures continued to happen at a high pace. Homeowners were kicked out of their home, and then the institution that lent the money in the mortgage would auction the home themselves. The home would still go at the lower price, however. The large amount of foreclosures caused the government to step in.
Short sales, then, came in to play. A short sale occurs when the homeowner sells the home for a much lower price than what they originally bought the home for, with the lender’s acceptance. So instead of being foreclosed on, the lenders accept the price to avoid expensive foreclosures and long, drawn-out repayment options.
Short sales are most often considered the better option for a homeowner. While there are still negative outcomes of short sales, the negative aspects are generally considered a much better option than a foreclosure.
For example, after a foreclosure if a homeowner wants to get a new mortgage loan they need to wait nearly five years typically before they can qualify. Short sales, however, usually take around two years. Also, because of the Making Home Affordable (MHA) Program, short sale owners get an allowance of $1,500 for relocation expenses, and are usually exempted from any taxes on the forgiven amount of the real estate sale.
Todd McCauley is an owner/agent of Eagle Rock Properties, a Boise real estate brokerage. He manages a program called The HELP Program that designed to help struggling buyers qualify for a home. He helps buyers and sellers with Boise homes.