Most people are confused about short sales vs. foreclosure. Both are options presented by mortgage lenders when borrowers can no longer afford to stay in their home. Homeowners facing foreclosure or attempting to negotiate short sales should consult with their bank’s loss mitigation department to determine which option is available.
Similarities and differences exist with short sales vs. foreclosure. Neither option allows borrowers to keep their home. Short sales allow borrowers to sell their property at a discounted rate to satisfy the balance owed on their mortgage note. Foreclosure forces homeowners to return the property to the lender and relinquish all monies vested in the property.
Short sales are usually the better solution for borrowers delinquent on their mortgage loan, but not yet entered into foreclosure. This type of arrangement requires approval from the mortgage lender and requires borrowers to undergo a financial audit.
When borrowers become delinquent on their mortgage loan, their account is turned over to a loss mitigator. These individuals work with borrowers to resolve the delinquency. Loss mitigators will first attempt to obtain a loan modification if borrowers are able to make future mortgage payments.
When borrowers do not qualify for a modified loan, banks can offer the option of a short sale if the borrower and their property meet specific criteria. In order to determine eligibility, borrowers must submit a short sale packet consisting of various financial documents such as bank and credit card statements, payroll records, tax returns, and a list of income and expenses.
Most loss mitigators require submission of a short sale hardship letter. The letter of hardship allows borrowers the opportunity to explain circumstances which caused the mortgage delinquency. Loss mitigators prefer handwritten letters that not only include a timeline of events, but any actions taken to overcome financial difficulties.
Depending on the lender’s policies, borrowers must either have a buyer lined up or list their property through a realtor. If banks allow borrowers to list their property, the home must be sold within a few months. Otherwise, the lender will commence with foreclosure proceedings.
It is important to understand the type of short sale available through the lender. Two types exist and include Payment in Full or Deficiency Judgment. Payment is Full is the preferred choice because is releases the borrower from paying additional funds.
When banks issue deficiency judgments, the borrower is held responsible for the difference between the sale price and loan balance. Deficiency judgments can amount to several thousand dollars and take years to repay. Judgments remain on the borrowers’ credit history until paid in full and can prohibit them from obtaining any type of credit for several years.
Foreclosure remains on borrowers’ credit reports for up to ten years. The foreclosure process can take between three and twelve months to complete. Once property is foreclosed it is placed for sale through public auction. If the property does not sell, it is returned to the lender.
Bank owned homes are sold through the bank’s loss mitigation department or local realtors. When foreclosed real estate sells for less than the loan balance, mortgage lenders can issue deficiency judgments against the homeowner.
One solution to prevent foreclosure deficiency judgments is to request a Deed in Lieu of Foreclosure. Similar to ‘Payment in Full’, a deed in lieu releases borrowers from repayment of the deficiency amount.