"What does it mean when I read a sale is 'subject to bank approval'?" "What is a 'short sale', and how will it affect my home purchase?" "How soon can I close if I see the sale is 'subject to lender's approval of a short sale'?"

As you might know, a "short sale" is becoming more and more common and means the homeowners are selling the house for less than what they owe on it.  For example, a homeowner might owe the bank $200,000 on the house, but can only sell it for $180,000.  In this case, their bank has two options when they sell it for $180,000 - it can either force them to pay thedifference of $20,000, or the bank can just write it off as a business loss and the sellers are off the hook for the money.  The bank makes the decision on how much of the debt it will forgive, so it might say it will meet the homeowner half way and write off $10,000 and the homeowner will need to write a check to the bank for $10,000 when they sell.  Or, the bank may forgive the whole amount, it's up to them how low they will allow the sellers to go. 

The good news is that the banks really don't want the houses, so they want to do everything they can to help the seller get out of a bad situation.  This is becoming more true with the increasing amount of foreclosures and banks take back more and more houses.  The banks are really trying to cut their losses, so they are becoming more willing to approve a full short sale as long as the purchase price is reasonable and close to market value. I toured a home today where the bank had given the approval for a short sale as low as 10% below what the homeowner owed on it.

All this means for you is that it usually takes a little longer to negotiate the final sale price of the property because it takes a while for the bank to review the offer and approve or reject the offer price or terms.  Just keep in mind that the seller does not have the final say in your offer being accepted, rejected or countered.

Sometimes the bank who is selling the house will want you to qualify for financing through them, but you don't need to use them to finance your purchase.  If the bank requires you to qualify through them, they just want to know that you are a well-qualify buyer, but you should still have your choice of lenders to use in your purchase. 

On a side note, in the past if the bank approved a short sale and wrote off the difference as a loss without charging the homeowner for it, the IRS considered the forgiven debt to be income for the homeowner.  As in the example above, if the homeowners sold their house for $20,000 less than they owed the bank, the homeowner would owe taxes on that amount and would receive a large bill for the taxes. The IRS recently changed their rule on this as it was seen very unfair to a homeowner who was typically in dire straits to begin with. See my blog article "IRS Revision Bill HR3648"  to find out more about this change.

If you are facing foreclosure, the worst thing you can do is try to ignore it - you need to be proactive and take action and contact the appropriate professionals to help yourself and your family.  Foreclosure is a long and complicated process.  If you are facing foreclosure, read my blog article "Foreclosure Timeline" to find out how long you have to find help. If you are facing foreclosure, a short sale is one solution to the situation.  See my blog article "Falling Behind on Your Mortgage?" for other possible solutions to the foreclosure problem.

Visit my website www.MyNextNewHome.com for more information about my real estate services.