What is a Foreclosure and a Short Sale

In today’s real estate market the words foreclosure and short sale seems to be at the forefront of the industry.  Though many people understand some aspects of what these two real estate terms mean, they do not understand the full definition, which can also contribute to homeowners making decisions that may nor may not be in their best interest. 

1.       WHAT IS A FORECLOSURE:  Foreclosure is one the most intimidating words in the real estate industry today.  It causes an emotional and financial hardship whether the homeowner has resided in their home for a short or long period of time.  To explain it simply, a foreclosure occurs when the mortgage lender rescinds ownership of the property thereby forcing the homeowner to relinquish all of his or her ownership rights and involuntarily vacate the premises within a certain period of time.  The homeowner forfeits all monies paid into the mortgage and in fact could be responsible for court costs and other fees associated with the actual foreclosure proceeding.  One of the major reasons that foreclosures were taking place at such a rapid speed, which was also highlighted in the news was predatory lending.  Some of the other top reasons for foreclosures include job loss, decrease in work hours and ultimately in pay, separation and divorce, and this is just to name a few.  When homeowners purchased their dream homes, they never imagined that they would lose their home to foreclosure.  Another main negative impact that a foreclosure has on the homeowners who experience it is that their credit and ability to purchase a home in the near future are adversely affected.  Most lenders of today require a minimum of three years before a person who experienced a foreclosure can qualify for another mortgage loan.  Now that is not to say that there are absolutely no lenders who will give a person who has experienced a foreclosure a loan prior to the three years but it is to say that it may come at a higher price.  By higher price it means that their interest rate may be higher, they may be required to put down a larger down payment, or anything else the lender requires to approve the loan.   A foreclosure is not a process that happens overnight and in fact, it takes quite some time before a foreclosure actually goes into effect.  It is also not something that typically takes place as a result of just one missed mortgage payment.  If one payment is missed the homeowner may receive a call or a late fee or both but for a foreclosure to take place, generally a number of payments have been missed.  In order to fully understand the legal rights regarding foreclosures and process that has to be followed, a homeowner should check with the laws that govern their individual State.  Also, the best thing that a homeowner who is facing this type of hardship can do is to contact a real estate attorney for advice and or representation.   

2.       WHAT IS A SHORT SALE:  A short sale is a process by which the lender authorizes the homeowner to sell their home for less than what is owed on the mortgage balance.   To qualify for a short sale the homeowner must prove that he or she has tried unsuccessfully to sell their home for an amount equal to the balance but have been unable to due to the current market conditions.  The lender takes into consideration a number of different factors when deliberating on whether or not to grant the homeowner authorization to sell for less.  The homeowner will more than likely have to have their home listed with a licensed Realtor and be able to provide proof that the home is actively listed for sale.  Now, don’t let the word “short” fool you. There is nothing short about the short sale process.  In fact it can take ninety plus days for a short sale approval from the lender.  The agent will need to present all offers to the lender and the lender will ultimately decide which offer they will accept, if any.  Another important factor is to correspond with the lender to regarding all details and requirements involved to determine if the homeowner will be liable for any uncollected monies due on the mortgage loan.  This is important.  There have been occasions where homeowners have been granted permission to do a short sale on their property however they were responsible for the uncollected balance of the loan.  So, when considering doing a short sale on a property, it is important to get all of the details and weigh the pros and cons prior to actually doing a short sale.  Also, when doing a short sale on a property, homeowners should be prepared to submit a list of documents to their lender to include bank statements, tax return documents, sources of all income, a list of monthly financial obligations, and possibly more so that the lender can determine if a short sale is warranted.  The lender will most always require a CMA which can be performed by your real estate agent to provide proof of what homes of similar characteristics are selling for within a certain mile radius.  One of the downfalls about selling a home as a short sale is that the process can be lengthy and most people who want to purchase a home may not be willing to wait months for approval.  But, if this is the only way that you foresee avoiding a foreclosure on your property and the only way that you foresee being able to sell your home, a short sale may be for you.   It is always best to consult a real estate attorney with any questions or concerns that you have regarding your property and real estate in general.  Agents are limited with regard to the advice and information that they can provide.      

This information was written to provide a general idea of what a foreclosure and short sale are all about.  It is best to know the laws of your State regarding foreclosures and it is always best to consult the advice of an attorney if you are unsure or have in-depth questions regarding either of these processes.