Although there are more short sales occurring today as homeowners and banks look for more ways to avoid foreclosures, the increase indicates that the market may finally be clearing out the inventory of distressed properties more efficiently. Total pre-foreclosure sales rose 19% from the first quarter of this year and during the second quarter, more than 30% of homes sales in the U.S. were short sales that allowed homeowners to work with lenders to sell their houses for less than what was owed on the mortgage. The states with the largest quarterly increases in pre-foreclosure home sales included Nevada with a 43% increase, Washington with a 39% increase, California with a 38% increase, and Texas with a 34% increase.

Economists now feel that lenders are coming to terms with the situation and that the increase in short sales also means that the banks are losing less money. The average price of distressed homes sold in the second quarter was down less than 1% from the previous period and almost 5 percent from a year ago. Until the back log of distressed homes is cleared out, borrowers will continue to benefit by avoiding foreclosure and taxpayers will benefit from the reduced costs associated with the overall process.

Although there are more short sales occurring today as homeowners and banks look for more ways to avoid foreclosures, the increase indicates that the market may finally be clearing out the inventory of distressed properties more efficiently. Total pre-foreclosure sales rose 19% from the first quarter of this year and during the second quarter, more than 30% of homes sales in the U.S. were short sales that allowed homeowners to work with lenders to sell their houses for less than what was owed on the mortgage. The states with the largest quarterly increases in pre-foreclosure home sales included Nevada with a 43% increase, Washington with a 39% increase, California with a 38% increase, and Texas with a 34% increase.

Economists now feel that lenders are coming to terms with the situation and that the increase in short sales also means that the banks are losing less money. The average price of distressed homes sold in the second quarter was down less than 1% from the previous period and almost 5 percent from a year ago. Until the back log of distressed homes is cleared out, borrowers will continue to benefit by avoiding foreclosure and taxpayers will benefit from the reduced costs associated with the overall process.

One look at the records for home sales in the second quarter of the year (April-May-June) shows that foreclosure sales and short sales, including those homes purchased after they received a notice of default or those that were repossessed by lenders, accounted for nearly one full third of the total market activity. The latest numbers from RealtyTrac Inc., a firm that compiles and markets default data from across the U.S., pegged the actual percentage of foreclosure sales in the spring quarter at 31%. The figure clearly shows the distress the U.S. housing market continues to endure when you consider that the percentage of foreclosure sales in a healthy economy and housing market would only be about 5% of the total home sales. At the same time, the interest rates for fixed mortgages in the U.S. slowly began to inch upward after nearly a decade of record low rates.

Industry watchers say that the percentage of foreclosure sales would have been even higher if not for the recent state and federal investigations into faulty mortgage paperwork created by lending banks and loan servicers which have caused many lenders to temporarily delay their foreclosure sales for now. Once the financial probes are completed, foreclosure sales will probably increase in the fourth quarter of this year. The banks are eager to see the backlog of foreclosures cleared up so that they can get them out of inventories and allow the housing market prices to begin climbing back up to where they were before the bottom fell out of the housing market.

The 31% number is not great news but it is better than the 38% of home sales that foreclosures represented two years ago. However, the selling prices for both foreclosed homes and short sales still went for about 21% less than an average home would in the same period. On a state-by-state basis, Nevada suffered the worst with a whopping 65% of all homes sales in the sate being foreclosures or short sales. Arizona didn’t do much better, with 57% of all home sales being foreclosures, and California was not far behind at 51%. Michigan, Colorado, Florida, Illinois and Oregon also share the distinction of having foreclosure sales accounting for a one-third of all home sales in the first quarter.

Although mortgage rates on a 30-year fixed mortgage rose to 4.22% recently, that number is still very low and represents some of the lowest levels on record dating back to the early seventies. The average rate on 15-year fixed mortgages are also very low at 3.36%, but low mortgage interest rates alone have not been enough to heal the overall weak housing market and the problem is reflected by the rate of new mortgage applications that is now at a 15-year low.

In the past, most banks preferred to foreclose on a delinquent loan instead of allowing a short sale because the foreclosure would net them more cash in the long run. Things are very different today as thousands of homes tumble into default every month in the current housing market recession. Now the banks are beginning to prefer short sales as the more effective way to get bad loans off their books.

The lenders have found that foreclosures are usually lengthy and complicated, while short sales are quicker and cheaper. Data shows that the average foreclosure takes about 318 days to process, and in some states it can take up to 600 days. There is no profit being made on a house during the period it takes to process a foreclosure and the time and work involved now cost the banks more profit than a short sale would. The reality of the situation has led three of the nation’s biggest mortgage lenders to try to streamline the short sale process for borrowers who are unsuccessful in getting loan modifications and are facing the threat of foreclosure.

Bank of America, JPMorgan Chase and Wells Fargo are all attempting to help their borrowers by offering more incentives to homeowners suffering financial hardships and help them complete a successful short sale. Many banks are also trying to reduce the amount of time it takes to approve a short sale. JPMorgan now averages 5,000 short sales per month and says its average time to approve a short sale transaction is just 30 days. Comparing that to the average time for the foreclosure process which covers from the time of notice to the completed foreclosure, is now 318 days in the U.S, shows the short sale advantage.

The more time it takes for a foreclosure, the longer a bad loan stays on a banks’ books. This makes foreclosure more expensive due to the legal fees as well as the costs of maintenance while a property is in foreclosure. In this current weak economy, financial analysts are paying much more attention to expenses and the banks are becoming more willing to look at alternatives like short sales.

The states with the highest number of short sales are California, Arizona, Colorado and Florida. Recent real estate statistics show the numbers of short sales in the housing market have tripled within the last two years and are projected to increase by at least 25% during 2012. Because the negative financial impact of a short sale is usually less than that of foreclosure, short sales can be an effective way for lenders to minimize their overall losses.

In most cases, preventing a foreclosure is the best option, even if it does take a short sale. However, the short sale process can be complicated and both sellers and buyers must set realistic expectations going in. Borrowers also need to keep in mind that their credit score will not be any less impacted by a short sale than it would be with a foreclosure. In both cases, the borrower is in default, but in a short sale the debt is often forgiven and the borrower might be able to apply for another mortgage much sooner than with a foreclosure, which could take as long as 7 years.

According to recent reports in the Wall Street Journal, the U.S. government is investigating some creative new ways to try and limit the number of foreclosures going back onto the housing market in an effort to prevent unsold foreclosed homes damaging American home values even more than they have already been impacted in the current market downturn. One surprising remedy hatched by the Obama administration is a plan to simply rent out all the foreclosed homes instead of putting them back on the market.

It appears the administration is looking at the viability of pulling foreclosed homes off the market at a time when rents are steadily increasing and home values continue to fall. The plan is centered on the premise that lenders would be able to take advantage of the higher rental rates to cover their maintenance and operating costs while at the same time retaining the titles to their foreclosed properties until such a time that the real estate market stabilized again. Some backers of the administration’s plan even say that the lenders might even be able to make a profit on the eventual sales of the homes if the rental incomes will support holding the homes over time.

So far, the discussions on the plan are at the conceptual stage, but the government obviously feels the pressure to come up with a workable plan at a time when distressed homes continue to be sold off in discounted short sales, a source of big distress for the entire real estate market. The number of foreclosure sales conducted by Fannie Mae and Freddie Mac currently stands at 50,000 per month. Credit analysts have estimated that if the number of foreclosure sales could be reduced by 20,000 units to just 30,000 per month, it would yield a full 33% reduction in the overall number of distressed property sales. The move could also prevent the 3% to 5% drop in home values that many analysts predict is just around the corner. Federal Reserve Chairman Ben Bernanke did not comment on renting the homes but he did say that taking foreclosed properties off the market could be an idea worth looking into.

One aspect of the proposed plan that has not been worked out is that renting out foreclosed homes would also come with the side effect of putting the government and mortgage lenders into the unfamiliar role of landlords. Some analysts suggest this could be a good thing though, as new jobs would be created from the need to hire more property managers to control all the new rental properties. Other proposals included encouraging investors to buy up more foreclosed properties in exchange for agreeing to rent them out instead of trying to sell them, although the investors would still need property management firms to handle the rents and tenants.

Many people that experience the financial hardship of a short sale of a home, a foreclosure, or a bankruptcy, are unclear as to how those events will ultimately impact their credit scores and their ability to purchase anything on credit again.

Thankfully, there is a source of information on just how hard those hardships impact a person’s credit today available from FICO. FICO is an acronym for the Fair Isaac Corporation, one of the pioneer credit scoring companies that started scoring credit ratings back in 1956. The FICO group provides information on how short sales, bankruptcies, and foreclosures will affect your credit score in the form of a chart that shows the impacts relative to two hypothetical credit scores, one at 680 and the other at 780.

Starting with a 680 Credit Score:

30 days late on mortgage results in a lower score of 600-620.
90 days late on mortgage results in a lower score of 600-620.
Short sale, no deficiency results in a lower score of 610-630.
Short sale with deficiency or foreclosure results in a lower score of 575-595.
Bankruptcy results in a lower score of 530-550.

Starting with a 780 Credit Score:

30 days late on mortgage results in a lower score of 670-690.
90 days late on mortgage results in a lower score of 650-670.
Short sale, no deficiency results in a lower score of 655-675.
Short sale with deficiency or foreclosure results in a lower score of 620-640.
Bankruptcy results in a lower score of 540-560.

Using the FICO chart it is easy to see the credit score impacts of the various negative financial events like a bankruptcy. As a general rule, major impacts like a bankruptcy will cause a person with a credit score of 680 to experience a 130-150 point drop and a person with a 780 credit score will see about a 220-240 point drop.

Losing a few hundred points on your credit score is never a good thing, but it is not insurmountable and despite the fact that a bankruptcy will be reported for ten years on your credit report, many people will see an improvement of their scores within just one year from completion of a bankruptcy case. In some cases it might take a year or two to see an improvement depending on the type of negative financial event and the types of loans sought. There is no getting around the fact that a bankruptcy, short sale, or foreclosure will have a negative impact on your credit score and your ability to purchase other things on credit in the future. However, if you truly have no way to pay off a large debt, a bankruptcy could be the shortest route toward reestablishing your credit as quickly as possible.

In the current and prolonged economic downturn many homeowners across the nation are struggling to make their mortgage payments on time. Any time people are in financial distress, it seems there are others just waiting for a chance to take advantage of the situation by promising false financial relief from their mortgage-related money problems and too-good-to-be-true loan modifications seem to be one of the biggest areas of mortgage-related fraud out there today.

Officials across the country have been fielding thousands of loan-modification complaints since late 2008 and there are no signs the scammers are quitting now. Homebuyers and home sellers both need to be aware that although loan modifications should make changes to a loan’s terms, like the reduction of interest rates, that would make the monthly payments more affordable, that is not always the case.

There are several key points to keep in mind when considering a loan modification and the first is to never pay any advance fees to a company that promises to lower your mortgage payments. Upfront fees are now illegal in most states. Before they became illegal, these advance fee schemes were known as foreclosure resolutions, which then became known as loan modifications and today they are being pushed as forensic audits. No matter what they are called, don’t get involved with advance fees. The same advice goes for advance fees for short sales, deed-in-lieu of foreclosure and mortgage-relief services as well.

Be on the lookout for testimonials that seem too good to be true and don’t believe those who tell you that bankruptcy is the only way to avoid imminent foreclosure. Although a bankruptcy might temporarily stay the foreclosure process, all too often far too many consumers end up losing their homes in process. There are no guarantees of success in loan modifications.

It is also a good idea to verify the real estate licenses of those you are dealing with and be sure to check for any disciplinary actions with your state’s Board of Realtors. Make sure everyone involved in a transaction knows exactly who will be paid and by whom and always read every document completely before you sign anything. Mortgage fraud is a crime and if you suspect you are dealing with a case of mortgage fraud or any other illegal real estate transaction, do not hesitate to contact your local District Attorney’s Office, the Department of Real Estate in your state or the department of Housing and Urban Development.

It is no secret that the real estate market in the United States has been depressed for more than a year now and more Americans than ever before are facing the looming threat of foreclosure as they struggle to make their mortgage payments on time. For desperate homeowners looking for ways to avoid foreclosure, an option that has been attracting a lot of interest lately is the real estate short sale. Short sales are becoming a common tactic for homeowners who want to avoid foreclosure. Both short sales and foreclosures are two types of properties in the growing group of bargain homes for sale on the market that includes distressed properties and auction homes too.

The biggest difference between a short sale and a foreclosure is that a short sale must take place before the home is officially repossessed or foreclosed on by the lender. Because a short sale property can be sold much faster than the time it takes to complete a foreclosure sale process, it allows everyone involved in the sale to get back to their normal lives much sooner too. Most short sales will have far less negative impact on a seller’s credit rating than a foreclosure or bankruptcy sale, they can still have some negative ramifications. Even though most lenders will view short sale sellers as less risky than foreclosed sellers, a short seller’s overall credit score could drop by as much as 200-300 points in some instances.

When the process works, a short sale can have good results for both the homeowner and the lender. The sale provides the seller an opportunity to avoid foreclosure and all the negative implications a foreclosure brings with it. The short sale allows a bank-owned property to return to home ownership sooner and allows the lender to receive most of the value of the loan sooner too. The lender also avoids incurring more legal or maintenance costs as the foreclosure process winds its way through the legal system. In conclusion, a short sale can be a better option for distressed sellers than a foreclosure, but going through the process and completing a sale is not an easy or simple process and potential short sellers should always seek competent legal and tax advice before they sign any papers or start making offers.

Ever increasing short sales have become a fact of real estate life in those parts of the country where home values have dropped substantially in the currently weakened economy. Short sales can have advantages for sellers facing foreclosure as well as for buyers who may be searching for a bargain deal on their next home. However, the process of completing a short sale transaction can be complicated, time consuming and expensive if you make errors. This makes it is important to understand both the pros and cons of any short sale deal you might be considering.

It is important to understand that a short sale situation is created when a seller facing the threat of foreclosure agrees along with their mortgage lender to accept a sales price for the property that’s less than the amount of money they actually owe on it. The seller will not make a profit on the sale but he will avoid many of the problems and expenses that would result from a straight out foreclosure.

Perhaps the biggest single advantage of a short sale is not just that the sellers avoid going through the lengthy foreclosure process but more that they avoid the negative impact of a foreclosure on their vulnerable credit rating score. Both the seller and the lender will have to work out the details of the agreement in a short sale, but when a short sale is completed correctly, the seller will not owe anything on the loan above the actual selling price. The biggest advantage of a short sale for buyers is the ability to purchase a home at a better price. Another benefit for the short sale purchaser is that since the bank owned the property, there’s little chance that they will need to remove a seller or tenant from the property on their own. The mortgage lenders can benefit from a short sale because they don’t have to worry about getting involved in a long foreclosure process and they won’t have to maintain the home. All a lender really wants is their money back and they don’t really want the responsibility of selling a home either, this means a short sale can sometimes be a good way out.

Short sales are not perfect panaceas though, and a disadvantage can occur when there are second mortgages or other lien holders on a single piece property. The problem pops up when the seller learns that not all of the lenders will relieve him of the responsibility of paying off the balance of the loan and even though the seller avoids a foreclosure, the short sale can still stain his credit. If the loan actually does not need to be repaid fully, the seller should always obtain a written statement from the lender stating that fact. If there is still a balance remaining to be paid, the seller can work with the lender to determine the best way to report the shortage to the various credit agencies in order to minimize the damage to his credit rating. Another potential problem for sellers is that most mortgage lenders will not enter into a short sale agreement with those who have missed multiple payments.

Getting a great bargain price on a short sale is not as easy as it might sound and buyers should make sure they do the necessary homework to generate accurate numbers on any deal they might be considering. Buyers who are seriously about entering into a short sale transaction might want to consider consulting a real estate professional to help answer questions and navigate the short sale process before they start making offers.

Home prices in the United States have dropped off in the weak economy to the point that now nearly half of the home sales in some of the more distressed areas of the nation are short sales where the bank has agreed to take a loss on the transaction. While buyers of these short sale, bank-owned properties can make some money in the process, it is always a good idea that they get somewhat educated before entering into any contracts.

Most of the real estate owned (REO) homes on the market have already been through a foreclosure auction that did not sell. If there had been enough equity in a property to satisfy the loan, it would have been sold and the bank would have been paid off. Instead, the loan amount probably exceeded the amount of equity and because the amount owed to the bank was more than what the property was worth on the market, the foreclosure auction did not result in a successful sale. The property then reverts back to the bank and becomes an REO, or real estate owned property.

When a home becomes the property of the banks and the mortgage loan no longer exists, the bank can then do any repairs or maintenance needed on the house and perform a tenant eviction if necessary too. The bank may negotiate the removal of liens and pay off any association dues as well. However, this does not mean all bank owned properties are great bargains. The buyer will have to do some research before they make an offer. They will need to make sure the new selling price is reasonable compared to similar homes in the area including the budget for repairs and the time it takes to complete them.

Even though different lenders will have different formulas, all of them want to get the best price they can before they resort to dumping a property below market value. Most lending banks have separate departments that manage their REO home inventory and a buyer submits an offer the REO department will often make a counter-offer. Buyers should not be put off by this tactic and should be prepared to simply counter all counter offers. It might seem to be a hassle, but the bank is only trying to get the highest price on a property that they can.

It is common practice for banks to try to sell a property in “as is” condition and they will usually allow a buyer to make all the inspections they want, but they will not always agree to make requested repairs. This means it is a good idea to include an inspection contingency period clause in your contract to purchase that allows a buyer to terminate the sale if a subsequent inspection reveals additional damages that the bank will not fix. It is also common practice for banks to refuse to provide financing on their own REOs, but when a property is in really bad shape and the buyer is purchasing it “as is,” the banks will sometimes relent and make the loan.

It’s easy to overlook the cash most real estate lenders lose when they get a house back in a foreclosure, but that’s the reason so many lenders would rather allow short sales instead of getting a house back in foreclosure. This means there is the potential to make a lot of money buying and selling short sale properties in today’s volatile real estate market.

Short sales are usually triggered when a borrower/homeowner owes more than their property is worth and they simply stop making the mortgage payments. The potential lies in finding a buyer for the property, even a buyer with an offer that is less than the loan amount, and you could make some cash if the bank accepts the offer. While it is true the bank is losing some money on the loan, they aren’t losing nearly as much as they would in a foreclosure, especially if they also had to perform major maintenance and make repairs to the house to fix it up.

This creates a situation where the lender will prefer short sale to a foreclosure because they just don’t want a house back. It is just easier and simpler when someone sells the house for them to get as much money as possible for a particular piece of property. If you have a buyer’s offer and the short sale offer is accepted, you can transfer ownership, the buyer will move in and the house is never taken back by the lender. Of course, the lender will want to make sure they are getting as much money as possible for the property and they will like it much better if it sold for close to actual market price. Lenders will accept offers below market value, but only if they absolutely have to do it that way.

You can work a short sale with the lender by yourself, you can get help from a Realtor, or you can even farm the work out. There are several different ways to make money in real estate short sales today because there continue to be so many problems in the real estate market. Despite the numerous disadvantages of selling homes in a weak economy, where there are problems, there are also opportunities, and people with the know-how can make some great money.

Short Sales Advantages for Lenders:

• Lenders lose less money than with a foreclosure.
• Lenders avoid getting a property back.
• Lenders avoid having a vacant house.
• Lenders avoid having to fix up a house.
• Lenders avoid having to market a house.
• Lenders avoid paying property tax.
• Lenders avoid paying interest payments.