What’s the Difference Between a Foreclosure and a Short Sale?

Posted on 04 September 2009 by Carl Martens

What’s a Foreclosure

Foreclosure is the process whereby the lender takes possession of the property.  A foreclosure terminates all rights of the homeowner covered by a mortgage.  Foreclosure is the process in which the estate becomes the absolute property of the lending institution.

When a homeowner fails to make the payments on their mortgage, the lender can begin foreclosure proceedings. This is a very specific legal process with set timelines and outcomes. In a Short Sale situation, the home owner’s name is still on title of the property and they are the official owners who are trying to sell the property. In a foreclosure, the lender takes possession of the house and as a result, the homeowner is no longer a party in the sale.

Foreclosure my pose potential problems such as: Title problems, Superior loan pay offs, IRS liens, tenants or owners still occupying the property, and/or structural problems.

What’s a Short Sale

Short sales occur when the current value of the home is less than the debt owed to the lender.  It occurs when a lender agrees to take less than the full loan payoff from the homeowner. The seller must demonstrate to the lender that they have a financial hardship and are unable to fulfill their mortgage repayment obligation.  In most cases, the owner is in default and is not making their payments for whatever reason.

Short sales, in most circumstances, are the first step to avoid foreclosure. Although the lender(s) will recover less than the total loan amount in a short sale, they may prefer this in lieu of foreclosure. The costs of foreclosing on a property may be more than the bank’s loss by taking a short sale. Also, the property may not sell at auction and then the bank would be forced to take it back as an REO (Real Estate Owned) property, which then they would have to maintain, list and sell themselves.

Something to keep in mind, the lender is under no obligation to grant a homeowner a short sale and in most cases it can be a frustrating process to get approved for one.  A Certified Distressed Property Expert, however is trained to help you with the process.

Banks are overwhelmed with short sale requests and the approval process can take months. Each bank evaluates each individual request on a case by case basis. Many times there is more than one lender involved. Not only do the banks consider the borrower’s personal and financial situation, but they also consider an appraisal of the property, market conditions, the banks financial situation, their current portfolio and in many cases have to consult with an outside investor who purchased the loan at some point. Given all of these varying circumstances, you can imagine why this process takes so long.

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