What is the difference between a “Short Sale” and a “Foreclosure”?
“A short sale is a sales transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan.
A foreclosure is the legal process by which a borrower’s interest in mortgaged property is taken because of a default on the loan. This usually involves a forced sale of the property with a real estate broker or at public auction with the proceeds of the sale being applied to the mortgage debt.
The “short” in short sale refers to the fact the mortgage payoff amount agreed to in the possible sale of the home is “shorter” (less than) the actual mortgage balance(s) owed on the property.
Properties are more likely to become short sales when the market is soft and the rate of home price appreciation is low. However, the loan is generally the main instigator for a short sale. The loan in a short sale is often subprime, highly leveraged, negatively amortizing, includes a prepayment penalty, or all of the above.
Why would a lender agree to a short sale? Lenders make their own business judgments when accepting or rejecting short sales. When negotiating short sales, knowing a lender’s concerns improves the ability to get the short sale approved. The bottom line is that lenders are in the business of making and servicing loans, not taking properties back through foreclosure and reselling them. Some of the things lenders want to avoid are:
Spending time and money to foreclose, evict borrowers, and resell properties.
Adding a bad loan and REO (real estate owned, lender owned) to their portfolio.
Paying property taxes, insurance, maintenance, and repairs for REO properties.
Risking theft and vandalism to the property, either by the borrower before they vacate the premises or by others when the REO property is vacant.
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If faced with foreclosure, what are my options?
Answer: Talk with your lender immediately. The lender may be able to arrange a repayment plan or the temporary reduction or suspension of your payment, particularly if your income has dropped substantially or expenses have shot up beyond your control.
You also may be able to refinance the debt or extend the term of your mortgage loan. In almost every case, you will likely be able to work out some kind of deal that will avert foreclosure. If you have mortgage insurance, the insurer may also be interested in helping you. The company can temporarily pay the mortgage until you get back on your feet and are able to repay their “loan.” If your money problems are long term, the lender may suggest that you sell the property, which will allow you to avoid foreclosure and protect your credit record. As a last resort, you could consider a deed-in-lieu of foreclosure. This is where you voluntarily “give back” your property to the lender. While this will not save your house, it is not as damaging to your credit rating as a foreclosure.
When do foreclosure proceedings begin?
Answer: Usually after the borrower has missed three consecutive mortgage payments. The lender will record a notice of default against the property. And unless the debt is satisfied, the lender will foreclose on the mortgage and proceed to set up a trustee sale, where the property is sold to the highest bidder.
Will I be able to buy again after losing a home to foreclosure?
Answer: It can happen. But a lot will depend on your circumstances and the mortgage interest rate you are willing to pay. Generally, most lenders will consider your request for a home loan two to four years after your foreclosure. Predatory lenders will issue a home mortgage in less time. But beware – they routinely charge high mortgage interest rates, fees, and penalties for this privilege. A quality lender will expect you to show that you have cleaned up your credit. Providing a reasonable explanation about the circumstances that led to the foreclosure – such as exorbitant medical expenses – is also helpful.
How can I protect my home from creditors?
Answer: consult with an attorney. It may provide special protection through the filing of a homestead exemption, which exempts some or all of the value of your equity in the homestead – or home that you live in and the land on which it sits – from claims of unsecured creditors. Whether to file a homestead exemption will depend on your situation. Contact your county recorder’s office for details.