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Got an underwater home? Consider a short sale

The U.S. housing market is finally on the mend, and we can ascribe some of that success to the practice of short sales. Short sales are an increasingly popular alternative to foreclosure, in which a homeowner sells the house for less than they owe on the mortgage. The bank takes the income from the home sale and forgives the remaining balance on the mortgage.

Ten years ago, short sales were a relatively rare commodity. Today, however, they have become commonplace. Banks are much faster at processing short sales, and in recent years they have come to recognize that short selling is often a cheaper and faster method than foreclosure.

When a home is sold in foreclosure, it is often in fairly rough shape. It usually has not been inhabited for months, and the long period of disuse generally decreases the home's value. Vandals or thieves can damage the home even more. By contrast, a short sale often occurs just a few days or weeks after the decision is made. The homeowner usually lives in the house right up until the point of sale, protecting its value.

Though the home is sold for less than the value of the mortgage, the losses incurred by the bank are often favorable compared to the losses experienced in foreclosure. Foreclosure requires a great deal of time and manpower; forgoing this option is often more economical for the lender.

Homeowners benefit by escaping from beneath an underwater home. When a home is underwater, it can seem very difficult to rid oneself of the property, as a sale would not be sufficient to cover the amount owed on the mortgage. A short sale allows homeowners to walk away from their home with a sense of freedom.

Of course, a short sale must be agreed upon by the bank. Working with the bank is not always an easy process, and it can sometimes be difficult to protect one's interests once the short sale begins. In such cases, it's often wise to speak to a real estate attorney. An attorney can assist the homeowner during the short sale by working to ensure that homeowner's financial liabilities are minimized at the end of the sale.

Source: The Wall Street Journal, "Help for Underwater Homes," Conor Dougherty, March 5, 2013

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