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

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]

Are U facing foreclosure and Want to Stop Foreclosure? – We have here 8 Ways to Stop Foreclosure.

Foreclosure is frustrating experience for most homeowners, especially those who don’t know where to turn for help. Banks and creditors seem to call at all hours of the night, you receive fliers in the mail nearly every day, and your credit score falls through the floor. But not all is lost. There are a few options for even the most desperate cases and if you can learn to use even just one of these 8 ways to Stop Foreclosure and you may be able to save your home.

Reinstatement
This technique is the quickest way to stop foreclosure and it involves making up any back payments owed to the bank, and promising to continue forward with your loan in good standing. The easiest way is sometimes also the hardest way, and the most expensive. Depending on your lender, reinstatement may require you to pay any fees associated with the back payments, which might include late fees, capitalized interest, recording fees, documentation fees, and even legal fees. Often times, these fees can be waived if it means getting the loan back in good standing, so if this is an option for you make sure to request such a change from your lender before completing the reinstatement. Reinstatement is an option throughout most of the foreclosure process and in some states it can be performed even after the foreclosure sale through what’s called a redemption period.

Mortgage Forbearance
A forbearance is asking the bank for special consideration, usually to skip payments, due to some financial hardship. Before a bank will agree to a forbearance you’ll have to prove the hardship; it’s not enough to just claim it as so. Typical hardships include lost job or lowered wages, hospitalization or increased medical bills, and the death or sickness of family members. Forbearance usually results in the bank allowing you to skip a payment or two, which could be enough to get you through the lean times, without terribly affecting your credit or standing with the bank. Forbearance is best achieved before your loan payments go late and well before you risk going into a foreclosure situation. If you think you might soon face a scenario where your loan payments may be tough to make call the bank immediately and explore this option.

Loan Modification
A loan modification occurs when the bank agrees to modify your loan by creating a new loan agreement with lower payments and different terms. Loan modifications are also done for borrowers who display a financial hardship, similar to forbearance. However, the range of financial hardship allowed in loan modifications is typically more broad, and includes modifying loans that are unaffordable for borrowers, loans that exhibit higher debt to income ratios, and loans knows as predatory loans, which feature higher than normal interest rates. The government has led the charge with loan modifications by standardizing the qualifying guidelines that bank follow in determining whether a loan modification will be approved or not. Through its Making Home Affordable Program, the government sets the rules for the Home Affordable Modification Program (HAMP), the Home Affordable Refinance Program (HARP), the Second Lien Modification Program, and the Home Affordable Foreclosure Alternatives Program (HAFA). Loan modification can be an arduous journey, sometimes taking months or even years to complete. Loan modification includes a financial analysis and new loan underwriting to determine the level of loan payment that would be affordable for the home owner/borrower. The actual loan modification will usually result in a new loan with lower interest rate and lower monthly payments. To achieve this goal, the new loan may capitalize old loan interest, have a longer term, or higher amortization.

Pre-foreclosure Sale
A pre-foreclosure sale occurs when the borrower sells her property privately before the lender holds a public auction. A pre-foreclosure sale is an option when the borrower can sell the property for an amount higher than the existing remaining loan balance, and can therefore payoff the lender in full. Lenders usually prefer this option to foreclosure because it saves them money that would normally be spent taking back the home through the foreclosure process. It also saves time and brings the bank’s investment back sooner than foreclosure. Paying the lender back anything less than the full amount owed is considered a short payoff.

Short Payoff
This is when the bank agrees to be paid off an amount less than the outstanding principal balance of the loan. To complete a short payoff, payment is usually requested by the lender in one lump sum, in cash or in the form of a new loan from another lender. A short payoff will be approved by the lender when taking the property through foreclosure would be likely to result in a lower amount of returned principal.

Short Sale
When the property is worth less than the remaining outstanding balance on the loan the owner can attempt to sell the property short. This means when the property eventually sells, the lender will be returned an amount of money less than what is actually owed on the property. This is similar to a short payoff, except in this situation the borrower is selling the home to raise the funds necessary for loan payoff, as opposed to refinancing the mortgage or making a cash lump sum payment. Short sales are only approved if the lender believes it will net less cash upon a foreclosure, and usually only after the borrower displays a financial hardship or a significant loss of market value in the property. With a short sale, the lender has to approve the purchase and sale agreement, which can take some time, but this is a good option for some sellers who have a marketable home.

Deed in Lieu of Foreclosure
For those who can’t make payments at all and don’t care to live in the property anymore they can offer the bank a deed in lieu of foreclosure. With a deed in lieu of foreclosure you are giving the title to the home back to the bank, which transfers the property in its entirety to the bank. This saves the bank time and money of having to actually go through the foreclosure process to gain the right to take title back to the home. This allows the bank to speed up the sale of the home and recoup its investment sooner. Like a short sale, the bank must approve the transaction before a deed in lieu can be completed. The deed in lieu process can take anywhere from a few days to a few months, but is usually a quicker process than either short sale, foreclosure, or loan modification.

Bankruptcy
This is the last resort for borrowers behind in loan payments. To declare bankruptcy means you are insolvent, or simply put, your liabilities (what you owe) outweigh your assets (income and property value). This is a legal proceeding administered by the courts, which puts the borrower on a payment plan and decides which creditors are repaid and which aren’t. Bankruptcy is a legal action which requires the help of a qualified, licensed attorney, and could become a costly endeavor. Bankruptcy may stop a foreclosure permanently, or just delay it. Depending on the type of bankruptcy declared, your credit report could be marked for up to ten years, seriously limiting your ability to obtain loans and credit in the future. Check with your lender if you have additional quesions about bankruptcy.

In most cases your lender will work with you to resolve any loan issues you might be facing. The lender wants to get your loan payment not your property. If you are currently behind in payments, or think you might soon get behind, make sure to call your lender immediately. The further behind you get the fewer options you will have available, and the bank will have less incentive to work with you in resolving the issue.

Remember, communication is key. If you’ve employed one of these eight techniques to avoid foreclosure you’ll likely need to submit new paperwork to the bank and wait for underwriting. Stay in contact with your lender as often as possible, and if your situation changes in the meantime, make sure to let the bank know that as well. Also, when dealing with any legal action or possible tax consequence, be sure to contact a qualified licensed attorney and/or tax professional.

If foreclosure has become a possibility, your best move is to start gathering facts and reviewing your options in preparation for making a plan of action. The longer you wait to act, the fewer option you have available to you to help in your efforts to keep your property. However, methodical, well-researched and well thought out action is crucial. Rushing to act in a panic mode can end up causing you more harm than good.

This article is originally published at www.directlendingsolutions.com