Short Sale Vs. Foreclosure/REO

Simply Put: A “short sale” or “pre-foreclosure” is when a seller tries to sell the house for less than they actually owe but need to submit the offer to the bank for their approval as well. This can be a lengthy process, in our area sometimes 3 – 5 months (sometimes sooner). Banks don’t have to allow a short sale and usually require the seller to show financial need to sell.

A “foreclosure” or “REO – real estate owned by bank” is a home that has been reposessed by the bank (foreclosed on) and is now owned by the bank. Many people think “short sales” are quicker than REO’s (bank-owned properties) but this is incorrect as REO’s are already reposessed by the bank and the bank has agreed to sell the house for the list price. Usually REO’s can have a response from the bank within a few days.

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is “doing the other a favor;” a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than foreclosure or continued non-payment would entail. A short sale usually does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Lenders may accept short sale offers or requests for short sales even if a notice of default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from the 2009 financial crisis they are now more willing to accept short sales than ever before.

The foreclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court-ordered termination of a mortgagor’s equitable right of redemption. If the borrower defaults (stops making payments as required) then the lender tries to reposess the property. At this point, the court can grant the borrower the equitable right of redemption if the borrower repays the debt (catches up with their missed payments). While this equitable right exists, the lender cannot be sure that it can successfully repossess the property, thus the lender seeks to foreclose the equitable right of redemption. Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes, unpaid contractors’ bills or overdue homeowner’s association dues or assessments.

Default: the inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid after 60 to 90 days. Once in default the lender can exercise legal rights defined in the contract to begin foreclosure proceedings

Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower. Foreclosure laws are based on the statutes of each state.

Pre-foreclosure Sale: a procedure in which the borrower is allowed to sell a property for an amount less than what is owed on it to avoid a foreclosure. This sale fully satisfies the borrower’s debt.

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