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.
What caused this to happen? Why were there so many defaulted payments? One reason was because many people couldn’t afford the payments with out refinancing the home with a much lower interest rate.
Since the real estate market was in an up market before the crash, homeowners ran in to trouble keeping up with paying the mortgage bill. They couldn’t just sell the home and purchase a more modest one. That was no longer an option, since there was no profit to be gained in selling a home in a down market.
Home prices were lowered, but interest rates were increasingly high. This caused it so even more homeowners couldn’t afford their payments and had their homes foreclosed on them. When the home was foreclosed, the borrower was kicked from the home and then the money lending institution sold the home at the lower rate themselves. Foreclosures were taking a huge section of the market, and the government decided to step in to help.
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, with a short sale if a homeowner wants to get a new mortgage loan they usually have to wait two years before they have good enough credit to qualify for a loan. With foreclosures it is usually around five years. There is also a difference with short sales getting a $1,500 relocation expenses allowance and an exemption from taxes on any forgiven amount from 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.
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