Home Buying in Morrisville>Question Details

thezweig2, Home Owner in Morrisville, PA

difference between a foreclosure and a short sale

Asked by thezweig2, Morrisville, PA Wed Jul 18, 2012

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A short sale is a real estate transaction where the proceeds from selling a home fall short of the outstanding mortgage amount against the property. A short sale is undertaken by an investor and a homeowner who cannot meet their mortgage requirement. The investor purchases the home below the mortgage amount (at a discount) and assumes ownership of the house. In turn, the seller’s mortgage is regarded as “paid in full” with the lender. The bank or institution who holds the mortgage agrees to the short sale because it rids itself of future losses in the form of foreclosure penalties/fees and or auction fees; furthermore, the lender eliminates a toxic loan from its balance sheet.

The short sale transaction is used as an alternative to a foreclosure because it mitigates reoccurring or additional fees to both the borrower and mortgage holder.

A foreclosure is the process by which a mortgage lender terminates an existing mortgage through a court order or by an operation of law. Foreclosures occur after the borrower (individual who takes out the mortgage from a bank to purchase a home) fails to meet the payment obligations outlined in the loan agreement.

Typically, a lender will offer a mortgage to a borrower, and in turn, the borrower—now homeowner—will pledge an asset (the attached house) to secure the loan. If the borrower defaults on payments, the bank or mortgage holder can repossess or foreclose on the property. That being said, if the borrower defaults, then repays the debt, courts of equity can grant the homeowner the equitable right of redemption. When a home is foreclosed it is either auctioned on the open market or re-sold by the coordinating bank and Real Estate Company. The previous owner, in the simplest of terms, loses all connection to the house.

If you are looking to purchase a property and it is a short sale, be prepared for the possibility of it to take a considerable amount of time 3-6 months in some cases. Once submitted to the bank, it go through the motions, researched, reviewed, ect. prior to accepting or countering the deficiency amount. Most lenders are also months behind because they have such a higher number of "loans in default" on their portfolios.

Purchasing a foreclosed property is a faster process than a short sale. Lending institutions have REO departments dedicated to selling their owned properties. Since they hold the title, there is less committee decision making. The asking prices are usually below market value, so buying an REO is an ideal way for prospective buyers to enter a market that they may normally be priced out of.

Make sure you do your due diligence on the property with a short sale or foreclosure. I would highly recommend having a home inspection to assess the condition of the property.

Best of luck,

Lisa marie
0 votes Thank Flag Link Wed Jul 18, 2012
Check out the web sight below, you can get an explaination there but in short...

A short sale is first of all not always a "fast" or "short" sale, it may take a while to close. It is when a home owner can no longer pay the mortgage and sells their house short of what is owed on it. The sale has to be agreed upon by both the home owner and the bank. A home owner can't just decide to sell their house short.

A foreclosure is when a loan has not been paid and it has been decided by court order for the bank to reposses or foreclose on the property. The bank usually puts the home up for auction or trys to sell it.

Best Wishes,
Amy Williams
0 votes Thank Flag Link Wed Jul 18, 2012
Hello the zweig2,

Are you asking as a buyer or as a seller. From an owners perspective if you are foreclosed upon, a bank can hold a deficiency judgement against you if they so wish. In a short sale typically the lender waives the deficiency judgement. Also in a HAFA short sale you can get $3000 moving expenses with a foreclosure eventually you get a sheriff at your giving you an hour to get out.

In essence, the short sale is cleaner for the owner of the property. As far as how a lender looks at it fter the fact. They are not reported as the same on your credit report but they are treated the same by mortgage lenders.

Alan Openshaw
Cornerstone Lending Inc
Southampton Pa 18966
215 953 0800
cell 267 992 7276
NMLS ID 143960
0 votes Thank Flag Link Wed Jul 18, 2012
A short sale occurs BEFORE the bank takes the property back, before the bank actually forecloses. The bank does not OWN the property, the seller does, even if they are behind in payments. A buyer makes an offer to purchase the home for less than the amount owed on the mortgage, the owner accepts that offer and then the offer is submitted to the bank for approval. The bank is going to lose money on the transaction and they will try to minimize their losses by coming as close to market value for the home as they can, however, the process can take a long time and the buyer can usually expect a discount for their time and trouble. The home is taken in 'as is' condition because the bank will not make repairs or even make an allowance for repairs that need to be done so a buyer needs to be sure they know the condition of the home and make their offer based on that information.

A foreclosure sale occurs AFTER the bank has completed the foreclosure process and the bank then actually OWNS the property. You still have to negotiate the purchase with the bank, which can be frustrating because banks are not acting rationally these days, and, again, the repairs will generally not be made so the buyer has to know the condition of the property and base his offer accordingly.

It is actually sometimes easier to get a good price on a short sale than on a foreclosure because the banks have less to lose at that point in time and the homes are usually in better condition because they are still occupied.

My advice would be to look at both options. Find a good realtor who is experienced in both short sales and foreclosures and follow their advice.
0 votes Thank Flag Link Wed Jul 18, 2012
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