Loss Mitigation Short Sales

Mortgage lenders are not required by law to work with borrowers to reduce their (the lenders') losses from a mortgage that is not being paid. However, from a business standpoint, it is a good idea for a lender to reduce or mitigate its' losses. One aspect of reducing losses is loss mitigation short sales.

Short sales are where a borrower finds a buyer for his/her home, but the sales price is not enough to pay off the borrower's mortgage. The mortgage lender will then agree to accept an amount less than it is owed and will cancel and satisfy its mortgage. Normally, the amount that the lender agrees to accept is the sales price less some nominal costs.

A short sale will help the borrower because it will stop foreclosure and allow the borrower to move on.

A short sale will help a lender because the lender's losses are somewhat pre-determined. If the mortgage lender is owed $100,000, but accepts $90,000, then the lender knows that it will lose $10,000 ($100,000 less $90,000).

Without a short sale or another loss mitigation option, the borrower will have deal with the foreclosure action as it progresses.

Without a short sale or another loss mitigation option, a lender will have to spend money to pay for legal costs, costs of home maintenance while trying to sell the house, and the costs of selling the house when a buyer is found. These costs cannot be determined in advance because no one knows how long a house will be on the market waiting to be sold. Also, a lender may have to reduce the price of a house to sell it.

To reduce their losses with a short sale, some lenders will not agree to a short sale unless the borrower promises to pay all or a portion of the difference between the amount that is actually owed to the lender and the amount that the lender accepts from the short sale. Since the borrower does not have the money to pay this difference amount, a lender will have the borrower sign a new Promissory Note whereby the borrower promises to pay the lender in the future. If the borrower does not pay the Promissory Note, the lender can file suit against the borrower to collect. Because the Promissory Note is considered a new debt, it is not part of the foreclosure action and is not bound by the fact that the foreclosure action was ended.

This is general information only and not legal advice. If you need specific information or have any questions of any nature whatsoever, talk with a lawyer licensed in your state.

Stop! Don't blindly chase any option to stop foreclosure. See stop foreclosure options to learn what options you have in your situation. Remember, what works in one person's situation, may or may not work in your situation to stop, avoid, and prevent foreclosure.

For more general information, see Stop Foreclosure - Five Options You Need To Know. For more detailed information see loss mitigation.

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