Of the 196 readers who participated in our recent poll, 22% (43 voters) reported having closed a short sale for a non-defaulting homeowner whose only hardship was negative equity, with no financial shocks affecting their ability to pay.

Lenders will likely agree to short sales for hardships other than negative equity when a homeowner is current on their payments. These hardships can include the need to relocate for a job or to escape a neighborhood blighted by vacant, foreclosed homes.

A homeowner who enters into a short sale without first going delinquent would avoid taking a huge hit to their Fair Isaac Corporation (FICO) score for the delinquencies, or eventual default. However, short sales are still reported by most lenders as debt “not paid as agreed,” and thus a homeowner who enters into a short sale, even without a delinquency, incurs a FICO score hit.

The only way to avoid FICO score damage is to come to an agreement with your lender to report the short sale as “paid as agreed.” This rarely occurs but is possible for the very determined.

Most lenders are hesitant to agree to a short sale when the homeowner cannot demonstrate a strong financial hardship, due to the moral risk involved. If the lender grants a short sale to one homeowner who can technically continue making payments, then who knows how many homeowners will follow — or so the moral risk argument goes. Still, the number of short sales in California increased 13%  in the second quarter of 2012, evidencing that lenders are growing more receptive to the foreclosure alternative. Getting underwater homeowners out of their negative equity properties is a good thing for the housing market and the broader economy, so we’ll take them as we can get them.

More good news is on the horizon: beginning November 1, 2012, homeowners with mortgages held by Fannie Mae or Freddie Mac will be eligible for a short sale without defaulting if they meet hardship criteria, which include:

  • death of a borrower or co-borrower;
  • divorce;
  • unemployment;
  • disability; or
  • relocation for a job.

Related article:

Defaults and foreclosures drop

Negative equity and foreclosure

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