What is the difference between a foreclosure and a short sale?
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By now all of you have probably heard the real estate terms "Short Sale or Foreclosure". Unfortunately, some of you may have already experienced either one of these or both. Believe it or not, these are not new trends in the real estate market. Economic conditions, increased unemployment and depressed housing values have all contributed to mortgage defaults causing the short sale and foreclosure markets to explode. According to a survey from the Mortgage Bankers Association the mortgage defaults and loans in foreclosure reached the highest record ever, in the history of MBA, at a whooping 12.07 percent.
Let's define "foreclosure". Foreclosure is not a type of property but a legal process which deprives borrowers / homeowners of their interest in the property they mortgaged through the lender. Foreclosures are taking much longer today than they use to due to the hundreds of thousands currently in default across the United States. Let's take a quick look at the process of foreclosures:
- First step is Pre-foreclosure - This is the period when the initial mortgage payments are in default until the distressed property is taken back by the bank.
- NOD is short for notice of default. It is the official notice a homeowner receives from their lender advising them they are in default. Typically the NOD begins the foreclosure process and it also outlines the reinstatement period.
- Reinstatement Period - This period of time is stipulated in the NOD. It advises the borrower that the loan may be reinstated; however, making required payments and bring the account up to date is the only thing that will stop the foreclosure.
- Short Sale - This is when a homeowner owes more for the property than the current value and wants to sell for less than what is owed on the mortgage. The lender has to approve a short sale before it can convey ownership to a new party. The homeowner may or may not be in pre-foreclosure.
- Notice of Sale - When the borrower receives the notice of default and he/she is unable to reinstate the loan then a notice of sale is recorded. The notice of sale is the document that explains when and where the foreclosure sale will take place.
- Foreclosure Sale - This is also known as the Sheriff's Auction, Sheriff's Sale or Trustee's Sale. The property is auctioned for sale to the highest bidder.
- REO - is the same as Real Estate Owned. This states the status of a property when a foreclosure sale has been unsuccessful or when the ownership of the property is transferred involuntarily to the lender.
Whatever your decision is concerning a short sale or foreclosure it is imperative that you consult with qualified legal professionals specializing in finance, taxes and attorneys that are experienced in foreclosures and short sales. If at all possible be sure you understand your options and avoid foreclosure. Visit www.hud.gov/foreclosure for more information. You can also visit www.foreclosurelaws.org to learn more about the foreclosure proceedings in your state.
Disclaimer: The above steps are an example of a foreclosure. The above proceedings may not be followed exactly from every known lender and bank.
Short Sales are known to be preferable to foreclosure. A short sale will typically lessen the impact a foreclosure can have on the community and it won't damage the home owner's credit as much as a foreclosure will. An example would be that if the homeowner is up to date on his/her's other payments, a short sale could lower the homeowners credit by as little as 50 points. That's a whole lot better then an approximate 200 point or higher hit with a foreclosure. Foreclosures are a matter of public record and stay on the credit history for seven years.
Following are some requirements that are important to a successful short sale:
- It will be imperative to the lender that the homeowner have a valid hardship.
- There will need to be ample time to accomplish a short sale. Hopefully when the new short sale laws come into effect on April 5, 2010, the time it takes for a short sale from start to finish will be reduced greatly.
- The homeowner should contact or already have contacted legal professionals for advice.
- Need to know if any additional liens exist on the property, such as HOA, taxes, additional mortgages, etc.
- And just as important, the homeowner will need to be cooperative in completing the short sale documentation and maintain the property for showings.
The lender will require that a hardship exists. Loss of equity in your home is NOT a hardship. Lenders will consider approving a short sale for homeowner's who have experienced the following;
- Job Loss
- Business Failure
- Illness and Medical Costs
- Divorce or death of a spouse
- Natural Disasters
