Tag Archives: Short Sale

Short Sale vs. Foreclosure: What’s the Difference for Buyers?

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Wondering what the difference is between a short sale and a foreclosure? In the following video, from the realtor.com YouTube channel, we learn about the differences and how savvy home buyers can get a bargain.

Foreclosures and short sales are both options for homeowners who fall behind on mortgage payments, but it’s important to understand the difference between these two processes. So if you’re struggling to pay your mortgage and aren’t sure what to do, allow this primer on foreclosures vs. short sales to set you straight. Here’s what these things are, their pros and cons, plus how to tell whether a short sale or foreclosure is the better option for you.

What is a short sale? A short sale happens when a homeowner owes more on the mortgage balance than the market value or sale price of the property at the point the owner wants to sell. For a short sale, the homeowner is essentially asking the mortgage lender (typically a bank) to accept a lesser amount than the total mortgage owed. For example, if the homeowner sells the house for $250,000, but the remaining mortgage loan balance is $300,000, the seller is essentially $50,000 “short” on paying the lender back. That’s a short sale.

What is a foreclosure? Foreclosure is a legal process that happens when a homeowner (although “borrower” might be a more appropriate term from the perspective of the lender) is unable to make mortgage loan payments for a significant period of time. After three to six months of missed mortgage payments, a lender will issue a Notice of Default with the County Recorder’s Office. This notice is to let the borrower know he is at risk of foreclosure—and when they foreclose, the current owner will be evicted.

What is the difference between a short sale and foreclosure? Short sale and foreclosure are similar in that they’re both financial options for individuals who own homes but find themselves in financial distress. Both also have a negative impact for your tax return, credit score and credit report, and future prospects getting a loan. But short sales and foreclosures differ greatly in process.

Top 5 Tips for a Smooth Short Sale

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Contributor: John Evan Miller

John Evan Miller

John Evan Miller

Short sales have become increasingly popular over the last year as homeowners seek to avoid foreclosure and lenders desire to keep their foreclosure inventory as low as possible. As a result, homebuyers are reaping the benefits and are snatching up properties for approximately 20% off!

However, short sales can be rather tricky. Here are some helpful tips to ensure your short sale experience is a success.

Tip #1: The Hardship Letter

Lenders only consider short sales when the homeowner is delinquent upon payments and is likely to undergo foreclosure. The homeowner must submit a hardship letter that outlines why he or she will no longer be able to pay the mortgage payments. At this time, the lender then decides that a short sale may cut their losses as opposed to moving toward foreclosure and being faced with up to double the loss and therefore approve the short sale.

As a seller, the hardship letter must be proved and based on fact and indicate that the reason you are getting out from under your mortgage payment is due to hardship and not merely due to a desire to rid yourself of a home that is declining in property value. Therefore, the hardship letter should be exceptional and presents your case accurately.

Although the hardship letter is important for sellers to obtain permission to do a short sale on the property, it is also essential for those seeking to purchase the property. It is best to ensure that the property is being sold due to an inability to pay the mortgage payments due to hardship (job loss, illness, etc.) as opposed to a deflation of property value. As a buyer, you definitely do not want to pay a significant price for a home you think you are getting a good deal on but in reality is drastically declining in value.

Tip #2: The Waiting Game

When it comes to purchasing or selling a short sale property, it is essential to understand that the short sale process takes time; therefore, do not expect an immediate sale. It is highly unlikely that the process will be short and painless, especially if more than one lender is involved. As a buyer, just realize that despite the wait, you will get a bargain on your new home. As a seller, remember that waiting is a lot better than facing foreclosure.

Tip #3: The Property

As a buyer, it is important that you understand that the property you are purchasing is more than likely being sold “as is.” Therefore, requesting repairs will more than likely waste your time. Instead, come to the table prepared to give a reasonable offer that obtains all essential elements, including a financial statement if at all possible. Having this documentation ready can help speed along the process.

Tip #4: The Reasonable Offer

Along with ensuring that you have proper documentation if you are the buyers, it is just as important to ensure that your offer is reasonable. If you present an offer that is ridiculously low, then you may not even receive a response to your offer. One of the best ways to ensure you are making a reasonable offer is to have an agent provide you with a list of similar homes in the area that have sold recently and the prices of these properties.

Tip #5: The Closing Date

When it comes to a short sale, the buyer and seller must realize that the closing date is NOT flexible. Once the date is set, then both parties need to ensure that they are completely prepared for closing on the date that has been agreed upon.

In the end, short sales can be successful and help both the buyer and the seller. These 5 tips can help ensure the short sale process is as smooth as possible.

Sources:

www.agentgenius.com

www.realtytimes.com

www.loansafe.org

www.realcentralva.com

homeguides.sfgate.com

www.trulia.com