We’ve all heard the terms “short sale” and foreclosures, but what do they really mean to you as a homeowner? What do they mean to homebuyers? to Realtors? Through this multi-part series we will explore what these terms mean and how they could apply to you.

Part 1:  What do I need to know before entering a Short Sale?

Before we get any farther it is important to understand what a Short Sale is.  Defined as the sale of a property at a value lower then the current outstanding loan balance, Short Sales occur because a seller is upside down (owner owes more then their home is worth) and unable to pay for their mortgage obligations, real estate commissions, closing costs, taxes, Homeowners Association (HOA) dues and assessments, or liens.

There are three main parties involves with every short sale. The Seller who is the borrower on the original loan that is being negotiated. The Buyer who is the borrower on the new loan that is being used to purchase the property if financed. The Loss Mitigator or Negotiator is the primary contact for the lender who will sign off on the short sale.

As a Realtor how do I know my client is upside down? In order to determine if there is a shortage you need to ask the seller to provide all current mortgage information.Make sure and ask if there is a second mortgage on the property or if there are any liens. In a Short Sale situation, the first mortgage lender has priority. Primary lenders will not take a backseat to a lien payment or to secondary lenders, both of which can  stop a Short Sale from happening. Second mortgages become an issue when the Seller has taken out their second mortgage with a different bank. The second bank must take whatever money the primary lender allows, which is often a very low amount. However, secondary lenders are often willing to negotiate because in the event of a foreclosure they recoup nothing. It is also important to note that the Seller cannot give the secondary lender more then the 1st lender allows because it is fraud.

In addition to current mortgage information, one must also look at tax records and run a comparative market analysis, complete a net sellers sheet and ask for a seller side only HUD. Once all this information has been collected and a shortage has been determined, you can begin the Short Sale process.

It is critical in a Short Sale that you as the Negotiator have all of the information about your clients finances and the history of the property. With the overwhelming number of Short Sales transactions occurring on a daily basis, details are what determine who is approved and who is denied.

Keep in mind that a title cannot be transferred before or during  a Short Sale. This means that the seller must be the same borrower on the original loan used to purchase the home. This condition can be waved in the event of death or divorce. In addition short sales must be “arms length transactions,” meaning no one involved in a short sale can be related. Why? This is done to prevent fraud and make sure that homes are being sold as close to true market value as possible.

So what happens if your Short Sale is rejected and you as the homeowner are still upside down? Foreclosure.

Lookout for part two of the 411 on “Short Sales” and Foreclosure series where we will discuss the details of foreclosures.

In Part 1 of “The 411 on ‘Short Sales’ and Foreclosures we defined a Short Sale and discussed what homebuyers and Realtors need to know prior to entering a Short Sale situation.

Part 2 of  Foreclosures takes a deeper look at all that is associated with the process. In addition, the ramifications of a Short Sale or Foreclosure on your credit score will also be discussed.

A Foreclosure is defined as the legal process by which an owner’s right to a property is determined usually due to default. There are four different types of default associated with Foreclosure:

  • The borrower has failed to pay in accordance with the terms of their note.
  • He or she has failed to pay taxes or insurance premiums.
  • The borrower was in violation of the due-on-sale clause
  • There was demolition or alteration of improvements, condemnation.

Once a homeowner has defaulted on a loan they enter loss mitigation. Loss mitigation can head two directions: the homeowner is declared bankrupt and the process stops, or the homeowner enters a Foreclosure situation. At this time, the owner will receive the Notice to Debtor, be evicted from the property and an REO (Real Estate Owned) Closing will take place.

The Notice to Debtor is a document that will be provided by the Lender at least 30 days before the Foreclosure date. This notice must be mailed to the property address or the address that was already designated in writing and must include the name, address and number of entity or person that the Debtor may contact.

Once the Mortgagor has been evicted, the home will go back on the market. When this occurs the Mortgagee (Lender) has two options: The home can be sold via a Real Estate Auction or it can be sold through a traditional sale.

So what happens to your credit score after a Short Sale or a Foreclosure?  For both a Short Sale and a Foreclosure, the debtor will see his or her credit score drop 200 – 300 points on average.  Short Sales do differ from Foreclosures in that they will show up on your credit score as pre-foreclosure in redemption on your credit report.

For more information about Short Sales and Foreclosures or to educate yourself on your options as a home buyer. Please visit www.UnnecessaryForeclosure.com this website, presented by the Northeast Atlanta Metro Association of Realtors provides useful tips and advice about how to avoid entering a Foreclosure situation.

Credit information was found on www.homebuying.about.com.

All information presented in this series is courtesy of the National Association of Home Builders‘ presentation “Short Sales and Foreclosures” given by O’Kelley & Sorohan Attorneys At Law, LLC

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