The AP today reported that the White House is expanding its mortgage aid program, adding some new options for homeowners to avoid a foreclosure. According to the story, the “new initiatives are expected to streamline the process of selling a home that is worth less than the mortgage, or transfer ownership of a home to the lender.” What that first option is actually referring to is what is commonly called a “short sale”, which can be one alternative to foreclosure (and/or bankruptcy) for homeowners who are unable to keep their home via mortgage modification or similar options.
As suggested, short sales are when homeowners sell a home for less than the amount they owe on the mortgage, and their lender typically forgives the amount “short”. Of course, short sales can only be done with the approval of a lender, which probably leads anyone to wonder why a lender would possibly agree to getting shortchanged. These days, there actually may be many reasons, as the government continues to take steps to prevent rising foreclosures.
As a final note, going through with a short sale isn’t without consequences. Homeowners who take that step will take a hit to their credit score, although it typically won’t be as bad as a foreclosure, and certainly not as bad as a bankruptcy. There may also be tax implications in a short sale that are best discussed with an attorney or tax professional.
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