What is a Short-sale and a Foreclosure?

A defaulting home owner’s lender, accepts a lesser compensation against the mortgaged estate and makes a sale. Such a sale is known as a short sale; one that falls ‘short’ of the actual value of the estate. On the other hand, a foreclosure involves a legal binding which denies the defaulter, the right to redeem the mortgaged estate. In a short sale, the proceeds generated on the sale of an estate are less than the actual value of the estate; and a foreclosure is simply the repossessing of an estate, if the owner is unable to make the abiding payments. Both the processes have their own set of difficulties. The wise option is to prefer the lesser of the two ‘evils’, which is short sale. Putting it briefly, short sale may be considered as a viable alternative to foreclosure.

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Reasons to prefer Short Sale over Foreclosure
Foreclosure should be avoided at any cost. It simply means losing the mortgaged home that could have fetched a decent value. The provisions of a foreclosure can be severe if the law grants the lender, the authority to recover its dues. The liability for a defaulter can increase, if the authority adds the costs of the arrears foreclosing on the lender. Although, both the procedures severely impact the home owner’s credit record, a foreclosure has more negative implications. A random and hasty selection may prove foreclosure as an easy way to end the agony. But careful inspection will prove otherwise. The current credit crisis in the world is a result of such haphazard action taken by borrowers.

A short sale record on the credit history, will at least enable the borrower to apply for an institution-backed loan in future, whereas a foreclosure will seal the chances of any help in the future. If a person opts for a foreclosure, there is an ineligibility status on the credit record for a period of 5 years. Short sale may be disastrous in consequences too, but only a year’s ineligibility for making a short sale, a lesser price to pay. This is according to the prevailing law in the U.S since May 31, 2008.

Filing for bankruptcy is another good option, until it is substantially proven by the concerned party, that a foreclosure was due to a big emergency like severe health problems or a big accident. Short sale is a tedious process involving a lot of legal, financial and tax issues. However, given a choice, it would be more suitable than a foreclosure.

Another problem confronting the mortgagor is, what if there are a number of short sales due? Wouldn’t foreclosure be a better option in such a situation? According to experts, a foreclosure should be considered as the last option, even in such cases. The amount for which a short sale or foreclosure is granted is considered as the mortgagor’s income by the IRS (Internal Revenue Service). Therefore, the amount is taxable, resulting in further liabilities. Hence, a short sale is preferable in this case.

A simple arithmetic calculation showing the comparison of both is explained below.

If a house is mortgaged for $500,000 and foreclosed on $400,000, the bank commission, holding cost, loss of interest, attorney fee and the miscellaneous amount will sum up to a huge deficiency. This deficit will be filed against the borrower, by the lender. Thus, searching for an easy way out, becomes a headache!

Now, consider that a short sale is made for the same amount. The proceeds generated would certainly be more than $400,000. Along with this, there would be no attorney fee or holding cost. Overall, the deficit would be significantly low. Another advantage is that you can always negotiate on the short sale deficit.

The bottom line is to accept the responsibilities of your actions and face the consequences bravely. In extremely tough situations, a level-headed approach will definitely help.

Article source: By Prashant Magar, http://www.buzzle.com

Questions About Short Sales: What is a Short Sale?

The term “Short Sale” is used in the real estate business to describe a situation where the current fair market value of the property is less than the debt owing against the property. In other words, the Seller can’t sell the property unless the creditors (“Third Parties”) agree to accept a payment that is less than (or “short” of) the amounts actually owed to those Third Parties. The Third Parties may include mortgage lenders, mortgage insurers, bankruptcy trustees, and federal, state and local taxing authorities (such as the IRS or State Tax Commission) or other lien holders. In some cases, the difference is forgiven by the lender, and in others the homeowner must make arrangements with the lender to settle the remainder of the debt.

To put it simply, a short sale is a transaction where the lender, or lenders, agrees to accept less than the mortgage amount owed by the current homeowner. In some cases, the difference is forgiven by the lender, and in others the homeowner must make arrangements with the lender to settle the remainder of the debt.

What does Third Party Approval mean?
A Short Sale requires the written approval of the Third Parties. The Third Parties may include mortgage lenders, mortgage insurers, bankruptcy trustees, and federal, state and local taxing authorities (such as the IRS or State Tax Commission) or other lien holders. Consequently, the Seller of the property and any Buyer is advised that even if they reach an agreement with each other for the purchase and sale of the property the Buyer’s obligation to purchase, and the Seller’s obligation to sell, are respectively conditioned upon Third Party Approval of the Short Sale.

Why is the number of Short Sales rising?
Due to the recent economic crisis, including rising unemployment, and drops in home prices in communities across the nation, the number of short sales is increasing. Since a short sale generally costs the lender less than a foreclosure, it can be a viable way for a lender to minimize its losses.

A short sale can also be the best option for homeowners who are “upside down” on mortgages because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.

What are the Tax and Legal ramifications of a short sale or foreclosure?
Anyone considering a short sale or foreclosure needs to understand that participating in a Short Sale transaction or having a property go through foreclosure may have negative legal or tax consequences.

WE ADVISE YOU TO CONSULT WITH YOUR ATTORNEY OR TAX ADVISOR IF YOU DESIRE SPECIFIC LEGAL OR TAX ADVICE.

 Source: www.blackhawkrealty.com

This is a resolved questions from Yahoo! Answers: Pre Foreclosure Process

Question:

I am in pre-foreclosure process and need advice!!!Refinance, Buy, sell, mortgage, real estate expert needed!?

Me and my boyfriend recently moved in together, but this forclosure crisis has caught up. We were wondering whether we should sell, refinance or file for bankruptcy?

I AM IN PRE-FORECLOSURE PROCESS AND NEED ADVICE!!!-REFINANCE, BUY, SELL, MORTGAGE.

Best Answer – Chosen by Asker

When facing foreclosure, most homeowners have multiple options. I will try to go through each one.

1.) First Option: Asks for Friends & Family for Loan
No one likes to ask for money. Especially if we think we can “handle it before the foreclosure date”.
Banks do NOT like taking back properties. They too are dealing with loss in property value. Bank own properties also known as REO take too much of the banks resources. Your bank will normally be more than happy to accept simple deposit or percentage of the money owed to reinstate your mortgage. You can requests these funds from friends and family with a repayment term that is comfortable for you. It is important to read and contact your bank about the possibilities of being reinstated.

2) Request Special Forbearance: Your lender may be able to work with you in a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses.

3) Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current.
You may ask your lender if they offer this service and if you qualify.

4) Refinance: Refinancing your property is an alternative many homeowners have used to prevent their foreclosure. By refinancing their property, they can reduce their mortgage to a more suitable or doable monthly payment. Be weary of mortgage firms that promise rates that seem too good. “Everything that glitters is not gold”.

5) Quickly Sale: Depending on the time you have before your foreclosure date, you can either hire a real estate agent in your local area or quickly sale to a real estate investor interested in your property.

6) File for Bankruptcy: Not the most favorable option. You must find a local attorney to assist you with bankruptcy as the laws for foreclosure prevention varies in all states.

A great source to find real estate agents whom would like to help you sell, investors whom would like to purchase properties, refinance agents to help you refinance, and bankruptcy assistance would be www.homeleafs.com.

Wow! I just answered a question like this!!!
Source(s):
http://www.homeleafs.com
http://www.hud.gov/foreclosure/index.cfm

Other answers:

The list of various methods to stop foreclosure that is presented below is a nearly comprehensive accounting of the most common ways homeowners can use to save their homes, either by staying in them and avoiding foreclosure, or by getting out of a bad situation with as much of their financial lives intact as possible. There are really no magical ways to end the foreclosure process — but there are enough tools that homeowners have available, that they can choose from a number of options to help them out of their hardship situations.

1. Save up and get current on the mortgage by paying back the payments you’ve missed, plus the interest, late fees, attorney fees, etc. Understand that there are often thousands of dollars of extra charges that are added once you start missing payments and especially if the lender hires a law firm to pursue the foreclosure.

2. Work with the lender to put together a repayment plan, which would require you to put down part of the amount you are behind now and pay back the rest over a period of months, along with you current monthly payment. Usually, repayment plans can be worked out through your lender’s loss mitigation department, and will result in you paying almost twice as much per month as your regular mortgage payment. This is to help you get caught up on the payments you missed while you are paying your original monthly obligation.

3. Work with the lender to modify the terms of the loan to say that the missed payments are spread out over the life of the loan or put on the back end of the loan. This is called a mortgage modification or loan modification. Some lenders will not do this because they do not hold the paper to be able to modify it. This is especially true for mortgage servicing companies, who only service their loans and collect payments, but who do not own the loans.

4. Refinance — find a hard money lender or traditional lender that will consider foreclosure refinance loans. Qualifications include lots of equity and lots of income, since your interest rate will probably be over 10%. Foreclosure refinance loans can be difficult to qualify for and may result in higher monthly payments, but they are a good way for homeowners to get a fresh start with a new note and new lender.

5. If you have an FHA loan, you can get a one-time loan from the FHA that will bring you current and is placed as a lien on the property that you would have to pay back if you sell or refinance the home. This is called a partial claim. You would have to contact the FHA directly for this one time payout to get you caught back up on your mortgage.

6. Sell to a private investor or friend/family member and lease/rent the property back from them. That clears off the foreclosure loan on the property and uses someone else’s good credit to get a new loan and allows you to stay in the property. Investors can also work out short sales on properties, allow they usually do this in the hope of flipping the property by reselling it quickly at a profit.

7. Bankruptcy will stop the foreclosure process, but is usually an expensive alternative to setting up a repayment plan, mentioned above. Attorney fees, trustee fees, court costs, and high monthly payments cause a lot of people to fail their bankruptcies. Only consider bankruptcy if you desperately want to prevent foreclosure and if you have a significant amount of income you can dedicate towards the bankruptcy payments.

8. Short sales are a good option if you owe more on the property than it is currently worth. A short sale means the bank accepts less than what they are actually owed, and would allow you to get out of the loan, at least. The bank would not be able to come after you for the rest of the loan amount, since, by accepting a lower amount, they forgive the rest of the debt owed on the mortgage.

9. Sell outright if the property is worth enough and you have a willing and able buyer. List the house yourself of through a local real estate broker. In some cases, it is the right decision just to unload the house to stop foreclosure and focus on repairing your credit until you can purchase a new, more affordable home in a few years.

10. If 1-9 do not work, you can offer the bank a deed in lieu of foreclosure, which means you’re voluntarily giving the property back to the bank and they are agreeing that the property is payment in full of the loan. This is not much better than a foreclosure, and you have to leave the property anyway, but it will prevent the sheriff sale and eviction process. The bank will not be able to ask for any extra money or sue you for a deficiency judgment, because they accept the property itself as satisfaction of the loan.

11. If 1-10 do not work, you can just move out and walk away and forget about the property. This is definitely not recommended if you care about your credit and plan to borrow money for several years, but foreclosure should teach you not to rely on banks to help you out when you face a hardship. All they really do is promise great deals when you think of going with them, and then throw you to the foreclosure dogs if you miss a payment. Many homeowners simply walk away because the foreclosure situation is so intimidating, but, as listed above, there are numerous options that are better than just giving up on the property.

Those are the most common options that can be used to stop foreclosure. There are a few others (suing your bank, etc.), but they involve much more cost and legal involvement and may not end up stopping the foreclosure process in the end.

Good luck.
ForeclosureFish

Which is better? A Short Sale or Foreclosure?
Patch’s Real Estate Columnist takes your questions and answers them words you actually understand.

Q: I’ve heard short sales are a good deal but take a long time. Is it worth the wait?

Short sales are worth the wait if you can do just that, wait. The length of time an approval can take depends on the bank that owns the property and every bank is different.

Some short sale offers get approved in a week or two, which is good. I’ve had others that have taken four to five months. You must have patience with a short sale if you’re going to survive the process.

Q: What’s the difference between a short sale and a foreclosure?

A short sale is when the homeowner is late on payments and is facing foreclosure. A short sale means the bank will be netting less money than what they are owed on that loan. The term ‘short’ means the bank is getting shorted on the loan amount payoff.

A foreclosure means the bank has taken the property from the homeowner. They have moved out and it is vacant. The average length of time to foreclose on a property now is 22 months.

Q: Which is a better deal, a short sale or a foreclosure?

Both are great. In both cases you are typically getting a home for less than it is worth. A foreclosure transaction moves much faster than a short sale transaction.

If you are in a time crunch, you want to focus on foreclosures.

Q: Why do short sales take so long?

Short sales take a long time because the banks processes are not great and they are overwhelmed.

Most short sale offers do not get assigned to a person at the bank (called a negotiator) until the offer comes in. At that time, the bank does an appraisal to get the home’s value and then makes a decision.

Sometimes all of that can take a few weeks to a few months.

If you are interested in learning more about short sales or foreclosures, you can read about them is some of our past articles.

About this article: Claudia has been in the real estate and mortgage business for 9 years and brings wisdom and perspective to the ever-changing face of Severn housing and development. Count on her each week to keep you updated on what’s happening in your backyard, literally![source]

The price may be right, but be prepared for the hassles.

Buying a foreclosure involves homework, patience, and often a good measure of luck.

Michael Lappano knows a home bargain when he sees one. In 2007, the Bellevue, Wash., real estate agent purchased a condominium for only $255,000 (including an outstanding lien). That’s $65,000 less than what comparable units were selling for, he says. To get the steep discount, he bid on the home at an auction for foreclosures. “The location was perfect, just two traffic lights from my office,” says Lappano. And the property was still worth about $315,000 a year later, even in the face of a nationwide slump in home prices.

Though many buyers now begin their home search with a request to look at foreclosures and bank-owned properties, there’s no guarantee that buying a foreclosure will save money compared with buying the traditional way. Discounts vary tremendously depending on where you live. In fact, many foreclosed homes are priced higher than their true value because sellers are trying to pay off the mortgage and cover taxes and transaction costs.

Plus, buying a foreclosure involves homework, patience and often a good measure of luck. If you’re buying at auction, you usually need to pay cash. You may face long waiting periods to take possession of the property and move in, and the property could require extensive repairs. Sometimes the former occupants strip the house of all appliances and vandalize the property.

You may also have problems getting accurate information before you buy, says Seattle real estate attorney Richard Llewelyn Jones. “There could be judgments and liens attached to the property or more than one note or deed of trust being foreclosed.” In the end, most buyers are turned off by the risks. “If you don’t know what you’re doing, you could lose your shirt,” says Jones.

Getting a Discount

If you’re game, find an agent who deals with foreclosures. Your agent can locate properties and establish their market value — which could be very different from the asking price. You will have to pay for any repairs, so build in a generous estimate of what they could cost. Also, you may need a lot of cash because traditional financing may not be an option.

Each state has its own rules governing foreclosures: whether the transaction goes through the court system, what taxes you pay and how much cash you need upfront. To get a summary of your state’s law, you can search online using your state’s name and “foreclosure laws.”

Also, you generally cannot get title insurance until you take ownership, nor can you expect the title warranties that usually kick in during a traditional home purchase. You need to inspect the title thoroughly, which means paying several hundred dollars for a title search and combing through it to ferret out all outstanding debts. Even so, says Jones, there may be title problems that aren’t of record or that appear on the record between the time of your title search and the public sale. Be prepared to pay off old tax liens attached to the home — and to buy title insurance as soon as you take ownership.

Three Ways to Buy

Wherever you live, there are three ways to buy a foreclosure: in a presale (before the lender forecloses), at auction or directly from the bank. In a presale, you negotiate with homeowners directly, before their home goes into foreclosure. Although the discount can be as much as 20% to 40% off the property’s value, a presale is the riskiest way to buy because deals frequently fall through and title problems are rife. And pre-foreclosure buyers have to add in the cost of an inspection and fork over real estate excise tax, as do those who buy bank-owned property. (Buyers at auction may avoid these costs in some states.)

Buying at a public auction is the most common type of foreclosure purchase. Buyers can expect a discount of 10% to 25% compared with buying a home through traditional channels, says Dean Street, an agent and 30-year veteran of foreclosure buying in the western U.S. But the road to auction can be bumpy, too. For starters, you often cannot inspect the interior of the home. Street says it’s vital to see the property even if you can’t gain entry. “If there is 300 pounds of garbage in the front yard, there is probably 600 pounds inside,” he says. One way to research the interior is to check the local building department’s permit records, or have your agent see if a recent listing has information on appearance, layout and previous remodelings.

Another Hassle

Most foreclosures that go to auction get postponed, usually due to bankruptcy or loss mitigation.

The winning bidder will pay for the property and take ownership within a set period of time, which varies according to state law. But you’re not out of the woods yet. Some states, such as North Carolina, give former homeowners a chance to buy the property back. Sometimes foreclosure buyers have to start eviction proceedings; once the house is vacant, you usually have to schedule repairs.

Work with the lender? If no one buys a property at the auction, it usually ends up back with the bank. Banks have a lot of these real estate owned, or REO, properties in their portfolios and are actively trying to sell them through agents. And unlike buying at auction, you can usually get a traditional mortgage for an REO. Unfortunately, lenders often list the property at or near market value to recover the outstanding loan amount along with legal fees, property taxes and maintenance costs.

But an experienced foreclosure broker can negotiate aggressively with a bank, especially when the property has been listed for a year or more. Plus, banks trying to sell foreclosures sometimes offer highly competitive financing packages to buyers, including low down payments and attractive rates. As home values decline, some lenders are willing to negotiate a “short sale,” in which the property is sold for less than the debt owed on the house. That’s one way foreclosure buyers can profit. In some markets, the discount is as much as 25%; but where there’s less inventory, the discount can be smaller.

You can find REOs through real estate agents. Or approach local banks or mortgage brokers directly and let them know you are prepared to buy a property “as is” with cash and request a discount from the asking price. Banks sometimes pay to remodel properties to improve their value. But with so much inventory on their books right now, most lenders want to unload foreclosed homes quickly, without having to refurbish them.

From Kiplinger’s Personal Finance magazine, June 2008. Article source link.