Basics of Short Sales vs. Foreclosure

There's much confusion about short sales vs. foreclosure. Both strategies have been making headline news due to Obama's failed Making Home Affordable program, Attorney General Investigations and government budget cuts.

Differences and similarities surround short sales vs. foreclosure. Neither allows homeowners to keep their home. Both can cause serious damage to credit ratings and can cause borrowers to owe money against a home they no longer own.

Real estate short sales grant homeowners opportunity to sell their house for less than the amount owed on their home loan. Borrowers must obtain short sale approval from their lender and adhere to specific protocol.

Obtaining approval is no easy feat and requires borrowers to become highly proactive in negotiating with their lender. It is crucial to take action before banks submit a Lis Pendens notice because once properties enter into foreclosure they become ineligible for short selling.

One source many homeowners are turning to is Making Home Affordable. This program was created by the Obama Administration in 2009 to provide homeowners with foreclosure prevention solutions such as loan modification and mortgage refinance.

MHA has since added foreclosure alternatives programs including short sales and deed in lieu of foreclosure. When homeowners obtain short sale approval through Home Affordable Foreclosure Alternatives (HAFA) they are not held responsible for deficiency amounts between the loan balance and sale price.

This can be a huge advantage because deficiency amounts are often several thousand dollars. If homeowners are held responsible for deficiencies and unable to pay the full amount upon completion of the short sale, banks can obtain deficiency judgments. In some cases, borrowers must endure wage garnishment until the judgment is satisfied.

HAFA is available to homeowners whose loan is owned or guaranteed by Freddie Mac, Fannie Mae, or any of the 100+ mortgage lenders participating in MHA. Borrowers must meet short sale eligibility requirements and list their home with a realtor for a minimum of 120 days prior to submitting their MHA short sale application.

Homeowners that qualify may be entitled to as much as $3000 in relocation funds. Eligibility requirements and a complete list of lenders is available at MakingHomeAffordable.gov.  

Those with loans not serviced by MHA lenders are required to work directly with their lender. When homeowners become delinquent with loan payments their account is assigned to a bank loss mitigator.

Bank loss mitigators do not make final decisions regarding short sale approval. Instead, they acquire necessary information to present to bank management. Homeowners undergo financial audit to determine if they are eligible to short sell their home.

Non-participating banks may or may not have the same eligibility requirements, so it is crucial to understand what is involved. Homeowners may find it helpful to work with a real estate attorney to assist them throughout the process.

Obtaining approval for short selling can take several months. Some banks require homeowners to list their property with a realtor prior to granting approval. Others allow homeowners to list their home for sale after granting short sale approval. Some lenders hold borrowers responsible for deficiency amounts while others accept the purchase price as satisfaction of the loan.  

Homeowners uncertain of available options or those needing help working with their bank may find it advantageous to obtain housing counseling through the Department of Housing and Urban Development.

Currently, HUD housing counseling is offered at no-cost, but government budget cuts have placed this program on the chopping block. Those in need of foreclosure help should reach out to HUD quickly, as counseling services may be eliminated the 4th quarter of 2011.

When borrowers default on mortgage loans and ineligible for real estate short sales, banks repossess the property. Once property is repossessed it is placed for sale through foreclosure auction.

Lenders can allow homeowners to enter into deed in lieu of foreclosure which lets them return their house to the lender and walk away. Just as with short sales, banks can hold borrowers responsible for deficiency amounts unless they qualify for HAFA.

Two types of foreclosure exist and include: judicial and non-judicial. Judicial requires the foreclosure process to be supervised through the court, while non-judicial is performed without court supervision.

Depending on the type of foreclosure and state where property is located, repossession can occur swiftly or drag on for several months. Once completed, homeowners witness severe damage to credit scores and will be unable to qualify for a mortgage loan for a minimum of two years.

Both short sales and foreclosure have adverse effects on credit scores, but foreclosure is more detrimental. While short sales are the preferred method, home sales continue to decline due to uncertainty within the market and lack of available credit. In other words, it can be difficult to locate a qualified buyer in the time required to complete the transaction.

Homeowners requiring assistance should reach out to their lender at the first sign of financial distress. In some cases, lenders can offer loan modifications to reduce the monthly installment amount. Making Home Affordable reports their program can lower monthly payments by as much as $500 per month.

Both short sales and foreclosure are an emotional event that can stop borrowers in their tracks. The worst thing homeowners can do is ignore the problem because it will not go away. Instead, reach out to HUD, Making Home Affordable, and the servicing lender to determine if properties qualify for short sales or deed in lieu of foreclosure.