What is the difference between a short sale and a foreclosure?

Short Sales and Foreclosures are two financial options available to homeowners who are late on their mortgage payments. There are different reason why homeowner would choose for a short sale versus a foreclosure. In both cases, the owner is forced to part with the home but the timeline and other consequences are different in each situation. Regardless of which approach you choose, always get legal and tax advice before deciding between a short sale and a foreclosure.

Short Sale

foreclosure or short sale

Short sale, also known as a pre-foreclosure, is a sale of a property for an amount that is less than is owed on the loan secured by that property. It is often used as an alternative to foreclosure because it mitigates additional fees and cost to both creditor and borrower. If your mortgage company agrees to a short sale, you can sell your home and pay off all your mortgage balance with the proceeds. In lieu of a foreclosure, banks will often settle for a short sale, because from a lenders perspective, it’s better to recover a portion of a mortgage loan than to absorb a total loss. Allowing both the lender and thehomeowner to end up in a better position. The negative impact on the borrower’s credit score is typically

smaller in a short sale than in a foreclosure, however, a short sale usually involves a lot more paperwork for all parties.

Advantages of a short sale:

• You no longer have a mortgage payment

• You are in control of the sale, not the bank or lender.

• You will spare yourself the social stigma of the “F” word, foreclosure.

• You can buy another home in 2 years, rather than 5-7 years, if you foreclose

• You save yourself the costs and fees usually associated with foreclosure.

• Your home sale will be handled like any other home sale, with respect and dignity.

Foreclosure

7Foreclosures are initiated by lenders only. The lender takes possession of the property, which was guaranteed as collateral for the loan. Many foreclosure takes place when the homeowner has abandoned the home. If the occupants have yet to leave the home, they are evicted by the lender in the foreclosure process. After the property is foreclosed upon, the lender puts it up for sale and uses the proceeds to recover the mortgage balance. Foreclosure takes shorter time to complete than Short Sale, because the lender is concerned with liquidating the asset quickly. Foreclosed homes are auctioned off, where buyers bid on homes in a public process.

 

Consequences of a Foreclosure:

• Stress and uncertainty of not knowing exactly when you will have to leave your home

• Eviction from your home, you will lose your home and any equity that you may have established

• It will damage your credit, affecting your ability to get credit, new housing and maybe even potential employment for a couple of years.

• You will lose any relocation assistance or leasing opportunities.

• The foreclosure is kept on a person’s credit report, forfeiting your ability to get a Fannie Mae mortgage to purchase another home for at least 7 years.

If you are having trouble making your mortgage payments, you should discuss these options with your lender as soon as possible. Be ready to outline your current hardship and explain the reason and why this is a long-term problem. Your mortgage company will need to understand the reason you are having difficulty in order for them to find the right solution for you.

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Renter caught up in foreclosure

Q. In Foreclosure!  I live in a house that had a lis pendens delivered for foreclosure with 20 days to respond. I have no interest or involvement with the owner or the house. Aside from moving out as soon as possible, is there anything else I have to do? Do I have any legal issues to worry about?

Unfortunately, the financial and mortgage crisis has been a wave that has taken many innocent people along with property owners and lenders.

You, it seems, are a renter in a property that is in the process of being foreclosed. The owner of the property you live in has either fallen behind on his payments to his lender or has simply stopped making the payments.

Now the property’s lender is trying to recover what it can by foreclosing on the property to sell it off and get the loan repaid.

You, on the other hand, may have a lease with the owner of the property. That lease obligates you to make payments to the landlord for your rent.

During normal real estate markets, a lender forecloses on a building or home and wants the place empty for resale purposes. The lender doesn’t want to be in the business of being a landlord. So the lender moves to foreclose and notifies all occupants of the property of the foreclosure proceedings and follows through to evict all occupants.

Recently, however, more and more lenders are coming to the realization that tenants are good for properties and are a good source of income for the thousands of properties these lenders are foreclosing on.

Where does that leave you? There are several possibilities:

If you live on a month-to-month lease at the property and the property owner has effectively abandoned the building, most people in your shoes do what you are doing now and pack up their things to find another place to live.

But if you like where you live, you might want to see if the lender wants you to stay at the property. You should contact the lender directly to see if the lender would want the rent payments to continue or if there is some way the lender can finance your purchase of the property.

Until the lender forecloses on the property, the property is still owned by (and managed by) the current owner. But lenders have the ability to take possession of the property without becoming the owner by getting the court to allow them to operate the building until the foreclosure is final. If the lender goes this route, you may find that the lender will be eager to keep you at the property.

If you have no lease but lived in the property as a guest of the owner of the property, you shouldn’t have anything to worry about with either the owner of the property or the lender when you move out. You’re free to move out whenever you have to or want to.

If you are a tenant on the property, your lease continues to be valid until it is canceled through the foreclosure process.

If you’re in a situation where your landlord no longer collects rent and is nowhere to be found, and you receive court papers that order you to vacate the property, you should be able to leave the property without worrying that someone is going to sue you down the line.

However, if your landlord continues to collect rent from you and is actively managing the property, you need to review the documentation you received from the court to determine if that documentation is sufficient to cancel your lease and allow you to move out without creating a Catch-22 situation for you in which you move out and the landlord sues you for non-payment of rent.

As a tenant, you need to make sure that the information given to you by the lender is accurate and that you do, in fact, need to forward rent payments to the lender.

How to Avoid Foreclosure

How to avoid foreclosure

A tidal wave of anxiety is washing over America, propelled by the mortgage industry collapse. BLOOMBERG NEWS

Worried about losing your house? This advice might help:

If you lose your job and know you’ll have trouble making your mortgage payments, call your lender immediately and follow up in writing. Above all, don’t ignore letters from the lender.

Stay in your home as long as possible. If you move out and the home is vandalized, the bank can charge you a fee to repair the damage.

Beware of predators. One red flag is someone who wants a fee upfront for something you can do yourself or get for free. For instance, if you’re having trouble getting through to your lender on the phone, don’t pay someone else to call. Ask yourself, “Is anyone going to profit from this?” If the answer is yes, proceed with caution. See whether a nonprofit group can help you first.

Under no circumstance should you sign over your house to someone who agrees to pay the mortgage until you get back on your feet. This is one of the most common scams going, and it typically ends with you renting back your home until the new owner decides to sell and evicts you.

Know whether a short-term fix will give you the time you need to catch up on your payments. Several programs offer one-time assistance, often only for a single month. They might only postpone the inevitable.

Use a Housing and Urban Development-approved foreclosure-prevention counselor. To check credentials, call 1-800-569-4287 or go to www.hud.gov/foreclosure.

On the Web, see HomeLoanLearningCenter.com; www.HousingHelpNow.org; and HopeNow.com, the government-led alliance of lenders, mortgage servicers, investors and advocacy groups.

The Orlando Sentinel