Short Sales Save You from Pre-foreclosure Woes

By: Kari Shea

That dream home in California has become a nightmare. Interest-only loans provided a way for anyone to own a perfect little palace with all the trimmings, but after a few years the rates soared and the payments became too much to bear. Four of the top ten metropolitan foreclosure areas are located in California. But there is hope. While you're in the pre-foreclosure stage, a real estate short sale may be the financial savior that you need.

The housing boom of several years ago in California caused many to get in far over their heads. What seemed like a steal for a home in paradise became a bid for a shack in the underworld once adjustable-rate mortgages shot through the roof. If you find yourself in this situation, the short sale may be your best friend.

Many times pre-foreclosure happens because of a sudden and drastic change in your financial situation. Everything's been downsized, you're bringing home less money and your payments have skyrocketed. Before you realize what's happened, you've fallen a month or so behind on your mortgage and have been notified of the default on your loan. Your world is shaking, but there's no earthquake being recorded. Fortunately, this financial hardship will most likely mean that you are eligible for a real estate short sale.

When the amount you owe exceeds the value of your home but you still need to sell, you are talking about a short sale. While still in the pre-foreclosure stage, a deal is arranged with the lenders wherein you would pay less than what is owed on the property. The difference is generally forgiven; though there are pitfalls to avoid.

It's important to be well aware of any possible legal consequences before committing to a short sale. Be sure that every little detail regarding the release of debt is in writing. Make sure that the lender is not going to force payment of the remainder after the short sale, especially if you have other assets to protect. There have been instances when sellers have been notified that the lender will seek repayment of the debt after the short sale is complete.

Lenders will usually consider a short sale only when you are at least one month in default on your mortgage. It's also important to have a buyer at hand who is financially able to take on the responsibility. Much documentation is required as proof of your inability to make payments because of your financial hardships. These may include tax returns with W-2s for the last couple of years, bank statements of the last few months and recent pay stubs. A copy of your 'deed of trust' and 'mortgage note' is also required. All of these documents will combine to form an image of your present financial state.

A home in pre-foreclosure need not be the proverbial financial guillotine that it appears to be. By choosing the option of a short sale you can avoid proceeding into the dangerous zone of foreclosure. Yes, it will affect your credit score. But it's a far brighter way out of the dark tunnel of mortgage debt than a foreclosure. As always, when considering options such as this, do your homework and find out the best option for you.

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