How Foreclosures Work

When a homeowner gets behind on their mortgage payments, the lender will start sending letters, including payment demands, notice of the owner’s options, as well as notice of the lender’s potential paths to collection. After about six to twelve months of missed payments, a lender may provide a notice of foreclosure; which provides a date of when the owner will be considered in default on their mortgage, as well as a date by which the occupant must be out else they will be evicted.


If the owner fails to sell the property or otherwise reach an agreement with the lender on an alternate resolution, the lender can file a notice of default with the county and proceed with having the occupant evicted and repossessing the property. Once the lender has taken legal and physical possession of the property, it can put the property up for sale via auction, which typically takes place at either the courthouse or at the property itself. If the property sells for less than what is owed on the unpaid mortgage, as is often the case, the foreclosed homeowner is responsible for the difference, and the lender can pursue payment through a legal instrument called a “deficiency judgment.”


How Short Sales Work

A short sale occurs when a property is sold for less than what is owned on the current mortgage. When a homeowner is facing foreclosure, they can try, instead, to find a buyer who will purchase the home at a discounted price, typically in cash. If the agreed sale price is less than the homeowner owes the bank, the homeowner must first get permission from the bank to proceed with the short sale. In deciding whether to agree to the short sale, the lender must speculate as to how much it can realistically recover if it goes the foreclosure route, and it will only approve a request for short sale if that speculative amount is greater than the proposed short sale price. If the lender approves the proposed deal, any remaining balance on the seller’s mortgage after closing will be forgiven by the lender, and the seller will walk away without owing anything.


Commonalities

The Homeowner Is Displaced From The Property Legally And Physically

Under both processes, the homeowner is expected (and sometimes forced) to physically leave the property, and they are always made to surrender the property legally (i.e., give up the title). One narrow exception occurs when the homeowner is able to make a quick sale to either a private buyer or to a real estate investor or rental management company where the buyer agrees to rent the property back to the seller. In such case, legally title is transferred to the new owner, but the seller is able to remain in the home subject to the terms of their new lease. Ryn’s Buying in a local real estate investor who offers creative solutions like this one. We will hlep you give you time time to find a new home and save your credit from forclosure.


The Homeowner Has No Say In Pricing

In both instances, the defaulting homeowner has no say in how much the property sells for. With foreclosures, the house is sold at auction without the owner’s input or involvement. With short sales, the homeowner is responsible for finding a buyer and for proposing the terms of the sale to their lender, but it is the lender who ultimately decides whether to accept the terms (i.e., sale price) of the short sale.


Differences

Different Acceptable Property Conditions

When a homeowner makes a short sale, it is understood that there may be issues with the home and that those issues won’t be fixed prior to the sale, but the homeowner is at least able to provide accurate disclosures to the buyer. When a home is sold at a foreclosure auction, on the other hand, it is generally sold as-is and without the benefit of the homeowner’s disclosure of known problems.


The Homeowner’s Effort Varies

Like most things in life, what you get out of these processes is proportionate to what you are required (or allowed) to put into them. For foreclosures, the homeowner’s role is to get out of the way while the lender sells the property. For short sales, the homeowner is also the seller and is responsible for preparing the home for sale, attracting potential buyers, and getting permission from their lender to make the sale at the short sale price.


The Financial Rebound Timelines Difference

While it is unfortunately the case that both foreclosures and short sales negatively impact sellers’ credit reports, the respective timelines for credit recovery are very different. After a foreclosure, the foreclosure mars the seller’s credit report for at least seven years, and the seller is typically prevented from purchasing another home for five years. While a short sale does affect the seller’s credit report, it is impacted to a lesser degree, and the seller often doesn’t have to wait any amount of time before purchasing a new, more affordable home.  If you want your credit not to be as heavily impacted, give Ryan’s Buying a call today!