While both a short sale and foreclosure involve selling a home with the goal of satisfying a portion of the outstanding loan balance, that is where the similarities end.
The most notable difference between a short sale and foreclosure is who is selling the home. In a short sale the home owner is selling the property with the bank's permission, whereas during a foreclosure the bank has seized the property and is selling it in an attempt to cover the outstanding loan amount. If you have fallen behind on payments, you may be worried about the bank foreclosing. But there are a few things you can do before it gets to that point.
Let’s discuss the difference between a short sale and foreclosure.
In order for a short sale to occur, the owner must ask the bank or mortgage lender for approval to sell the home for less than the bank balance. This can be done even prior to missing payments if you know you will not be able to make upcoming payments. This approval process generally takes a while, since the bank is weighing its options, so if you are considering a short sale on your home, its best to start the conversation as early as possible.
Once you gain initial approval and find a buyer, the bank must again approve the offer price and sale. If you have multiple offers the bank will choose the highest and/or most qualified buyer. The bank may also reject any and all the offers if they are not high enough to satisfy the debt.
It is important to keep communication channels open with the bank throughout the process. If you are unable to find a buyer, at a price the bank will accept, they may give you more time, agree to negotiate payments or work with you in another way.
Prior to taking ownership of the property, the bank will issue a notice of default, usually after 3 months of missed payments. At this time the bank is making the owner aware of the debt owed, but there is still time to avoid foreclosure and the impact it will have on your credit and ability to purchase a future residence.
If you have not already, contact your lender. Banks are not in the business of owning homes, and legal fees associated with foreclosure can become costly. Most of the time, banks are willing to work with owners to avoid the hassle of foreclosing.
Pre-foreclosure documents are filed at the county clerk's office, and are public record. Once the pre foreclosure process starts, you will begin showing up on public pre foreclosure lists. You may begin receiving phone calls from cash buyers in your area interested in purchasing the home. If the offers are above the loan balance, you can sell and pay off the remaining balance without bank approval. That said, it is still best practice to let the lender know about the pending sale, in case of a delay in the closing process. If the offers are close to the remaining mortgage balance, you may be able to bring the offer to your bank and request a short sale.
If a negotiation is not successful, the bank or lender will take ownership of the property and attempt to sell the home, generally at an auction, for as much as possible to cover the remaining bank balance. If the bank is unable to sell the property at auction, it will become a real estate-owned (REO) property.
Remember, when considering a short-sale or in the process of foreclosure, the most important thing is to stay in contact with the lender. If you are weighing your options, and exploring a cash offer, give us a call to learn more about all the available options to you.