Short sale information
Benefits of a short sale/preforeclosure:
A short sale's affect on your credit report is far less damaging than a foreclosure or a bankruptcy. A short sale appears on your credit report as "pre-foreclosure in redemption", not as "debt discharged due to foreclosure".
By making an effort now to reduce credit damage, you will be eligible to purchase your next home sooner than if you allow a foreclosure to take place. Fannie Mae guidelines state that you may be eligible within 2 years of a short sale to qualify for a new home versus waiting 5 years with a foreclosure.
What qualifies a property for a short sale?
The owners of the property are probably behind on their mortgage payments (this is not a requirement) and facing a potential foreclosure action. Further, the owners generally must show a financial inability to get caught up with their mortgage payments as well as a further inability to then continue timely payments in the foreseeable future. A recent hardship may favorably plan into the analysis. The property value on the open market today must also be less than what the owners owe their mortgage lenders.
The lender's motivation:
Why would your lender let you walk away from the home and forgive the shortfall on your loan? To save time and money. Foreclosures are expensive and time-consuming for lenders. On average a foreclosure takes a year to complete. Once the lender realizes that a foreclosure is inevitable, a short sale may seem like the lesser of two evils. Plus, short sales help the lender look good on paper -- the property was never listed as an actual foreclosure, which helps the lender's numbers.