The Foreclosure Process and Short Sale Process Explained
 
What is Foreclosure? (6-12 month process)
 
Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens.   The foreclosure process can end one of four ways:
 
  1. The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law.
  2. The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
  3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
  4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market.   The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a deed in lieu of foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).
  5. The lender agrees to sell the property through a “short sale” in which the lender agrees to release the lien on the home for less than the amount owed. 
What is a “Short Sale”?
 
WHAT IS A SHORT SALE? 
1.      A “Short Sale” (also referred to as: “Negotiated Settlement”, “Short Pay” or “Pre-Foreclosure”) occurs when a Lender agrees to accept less than the amount owed on the original note or total payoff, as an alternative to foreclosure. 
2.      If the property is worth less than the amount owed on the loan, then even if the Lender forecloses and takes back the property, they know they are going to take a loss. 
3.      We can often convince a Lender that they will “do better” if they take less than what is owed now rather than taking the property back by foreclosure and trying to re-sell it.
 
HOW LONG WILL IT TAKE?
1.      The Short Sale negotiation process can be rather lengthy. 
2.      It may take several weeks to several months for an approval. 
3.      Many Lenders will have several layers of bureaucracy, insurers, and investors that we will have to maneuver through in order to get a Short Sale approved. So, it is important to be patient during this long process.
 
BUT MY HOUSE IS GOING TO FORECLOSURE. WILL I HAVE ENOUGH TIME? 
1.      Maybe-maybe not. 
2.      Just starting a Short Sale WILL NOT automatically stop a foreclosure. 
3.      However, many times we can convince a Lender to stop the foreclosure to let us attempt to negotiate the Short Sale. 
4.      While there are no guarantees, it is worth the attempt.
 
CAN I STAY IN THE HOUSE? 
1.      The key word in a “Short Sale” is sale. 
2.      The purpose of a Short Sale is to get the property sold. 
3.      This is not a program that can stop a foreclosure and allow you to keep the house indefinitely.   
 
HOW DO BANKRUPTCIES AFFECT THE POSSIBILITY OF DOING A SHORT SALE?
Most mortgagees won't consider a short sale if the homeowner is in bankruptcy...why? Because negotiating a short sale payoff is considered a collection activity. Collection activities are prohibited in bankruptcy.

 
HOW DO I KNOW THIS WILL WORK? 
1.      Again, there are no guarantees. We have not, and will not make promises to you that this will work. 
2.      Once you miss a payment, the Lender is in charge and can proceed to foreclosure if they want to. 
3.      But we know they do not want to and we are very good at presenting alternatives to the Lender that they often want to accept, as opposed to moving forward with a foreclosure. 
4.      We are very proficient at what we do, but NO GUARANTEES are being made as to whether or not the Lender will accept the Short Sale.
 
WILL I GET ANY MONEY FROM THE SALE? 
1.      No. A universal requirement of Lenders in granting a Short Sale is that the borrower will not get any proceeds from the sale of the property. 
2.      Being the Lender is going to take a loss on your loan, they are most certainly not going to allow you to profit from the situation.
 
WHAT HAPPENS IF THIS DOESN’T WORK?
1.      Your house will likely go to foreclosure. 
2.      A Short Sale is something we try only after you have exhausted your other options.
 
WHAT IS A “RELEASE”? 
1.      A Lender may offer a “release”. This is a security instrument against the property in exchange for less than the total amount of the note. 
2.      A release will allow the property to be sold without paying off the obligations of the note. However, the note is not satisfied. 
3.      Advantages: The successful Short Sale will allow the property to be sold and thus avoid foreclosure. 
4.      Disadvantages: The remaining debt on the property (sometimes called a “deficiency”) still exists. In other words, you are still liable for the note and still owe the money to the Lender. 
a.       Reality: It is not likely the Lender will pursue the deficiency unless you have other significant assets. 
b.      However, if you chose not to try the Short Sale before going to foreclosure, and then you end up going to foreclosure, it will result in you having a deficiency anyhow.
c.       The deficiency generated from foreclosure is typically far greater than the deficiency created by a short sale because the foreclosure process is costly for the lender AND the property will not be sold for quite some time which means values will be lower than they are now so the lenders overall loss is greater.
 
 WHAT IS A SATISFACTION OF MORTGAGE?
 
1.      A Lender may agree to accept less than they are owed as complete and total satisfaction of the note and release its lien against the property. 
2.      Advantages: Your note and obligation to the Lender are satisfied for less than you owed. When the property is sold, the debt is paid off completely. 
3.      Disadvantages: You may have some tax consequences (see attached “Mortgage Forgiveness Debt Relief Act” document) that you should discuss with your tax advisor due to the fact the Lender is making money you owe them disappear. 
4.      Sometimes our negotiations are successful in obtaining a satisfaction. Although, there are other times where the Lender will only negotiate to release.
 
HOW CAN I HELP? 
The Lender will require a review of a financial package that usually includes:
·         (2) month’s bank statements,
·         (2) month’s paycheck stubs,
·         (2) year’s tax return,
·         Financial Worksheet and other information. 
 
The leading cause of delay and even denial of our offer to the Lender is caused by the Seller failing to cooperate and/or deliver the necessary items in a timely fashion. 
 
To help us succeed, please find as much of this information as you can right now. These things will help us work faster and increase your odds of a successful Short Sale.