foreclosures, short sales, reo

Foreclosures, Short Sales, and REOs Oh My!


With so many Americans facing foreclosure today, it is important to know what the process is and all of the details relevant to the subject. This article is for the purpose of explaining, in detail, the foreclosure process and short sales and the process and procedures that must be followed for both subjects.  We will address how sellers end up in foreclosure, ways to avoid foreclosure, alternatives to foreclosure and anything else that is pertinent to foreclosure. SHort sales in rela estate are an alternative for foreclosure and the positive side of short sales is the fact that many people, including astute investors, make a lot of money investing in homes about to go into foreclosure. Another subject in this article is REO investing as it is closely related to the other subjects and people should know about the money making opportunities that are available with REO homes.

What is the difference between Foreclosures, Short Sales, REOs


1    Foreclosures & Short Sales:  When a homeowner fails to make the mortgage payments for 3 months, the lender will mail out a notice of default asking for payment by a certain date. If no payments are received by that date, the lender authorizes their attorney’s to start foreclosure proceedings. In the following months, the homeowner will be under much stress and strain, as the process can last as long as 12 months or more. The homeowners credit score is going to be affected negatively and it will remain on your credit report 7-10 years. You will not be able to purchase a home for at least 5 years or more. On top of that, the IRS considers a foreclosure as a home sale and the income is taxable.
 Avoiding Foreclosure or Foreclosure Alternatives:  
Each state has its own laws regarding the foreclosure process so some of the alternatives listed may not be appropriate for all cases. Some options are:
Repayment Plan: This usually involves establishing a schedule with your Lender to make a full regular monthly payment plus a little extra each month, to repay the delinquent amount over a specified period of time.
Special Forbearance Plan: This option may provide for a temporary reduction or suspension of payments, that will be increased at a later point to repay the delinquent amount over a specified period of time.
Mortgage Modification: This option may allow you to refinance the debt and / or extend the term of your existing mortgage loan.
HUD Partial Claim: If your loan is an FHA insured loan, your lender may be able to obtain a one time payment from the FHA-Insurance Fund to bring your mortgage loan current with payments.
Refinance: This option may allow you to use the equity that you have established in your home to pay the delinquent amount. Depending on the interest rate of your new loan, your monthly payments might be reduced. You can explore refinancing with your existing Lender as well as with any Lender of your choice.
Sell the house:  If there is sufficient equity in the property, you may be able to receive more for your property than what is due on the mortgage loan.
Assumption: With this option, you would sign over the property to another person. That person would then take possession of your home, and take over making the payments.
Bankruptcy: Many people believe that by filing for Bankruptcy, it will allow the homeowner to keep a home, and will prevent it from going to foreclosure. Eventually the home will be taken by the lender and all bankruptcy will do is delay or put off the time until you loose your house. An attorney should be consulted before anyone considers any type of bankruptcy.
Pre-Foreclosure Sale: This option may allow you to sell your property for an amount less than what is necessary to pay off your mortgage loan.
Deed In Lieu Of Foreclosure: This option may allow you to voluntarily "give back" the property to your Lender without further damaging your credit.
Short Sale: A short sale is when the lender agrees to accept a mortgage payoff that doesn't cover the entire amount of the outstanding loan. This is a complicated process and can take up to 12 months or longer.  The seller, or homeowner, must prove that they are having severe financial hardship, and then present to the lender a variety of documents and paperwork that goes on and on. The homeowner must list and sell the home. There is much stress involved as the homeowner is under the gun with time restraints dictated by the lender.  Once you sell the property, you have to supply additional documentation. When the property is listed, your real estate agent prepares a comparative market analysis. You're going to need that and you will need to supply a copy to the lender, along with your hardship letter, and a variety of documents needed by the lender. The lender will need a copy of the purchase agreement, and a "net sheet" showing how much you will net (or lose) from the sale of the home.  If there is PMI on the home loan, then the PMI insurance company also has to give their approval for any sale.

If the lender feels that the deal is good, and the lender accepts you hardship letter, most likely the sale will be approved. If the lender approves the sale, thus forgiving the debt, the IRS considers forgiveness of debt the same as taxable income and you will have to pay taxes on that income. The Short Sale Process is a long one and is complicated and there are certain procedures to be followed. The homeowner will have to hire a real estate agent, broker or Realtor to do much of the paperwork and leg work involved.

An Important Note to Buyers and Brokers Regarding Short Sales
A short sale is a situation where a property seller(homeowner) needs to sell fast and the sale proceeds are not sufficient to pay off the existing mortgage. It is an alternative to foreclosure. The term short sale or short pay refers to a process whereby the mortgage company must agree to a reduced payoff in order for the sale to take place. All sale costs must also be included and the seller receives nothing, except debt relief and not having a foreclosure on their credit record.

If you're a prospective buyer on such a property, beware! The seller may accept your offer; you may invest $1000 in an appraisal and a property inspection, but you may not get the property because the mortgage company may not agree to reduce their payoff. The mortgage company is a third entity that is not a party to your contract, yet their decision will affect the outcome of the transaction. The mortgage company will review the short sale proposal and closing the sale will depend on their response.  Many short sales fail because the mortgage company representative is unfamiliar with the local real estate market and responds with an unrealistic proposal.

When buying a short sale property, don't expect a quick answer and don't expect the mortgage company to respond logically. They will seek any additional assets the homeowner may have and they will demand that the real estate agents or brokers reduce their commissions. They may demand the seller to sign a personal note to pay back the shortfall. Remember, the mortgage company wants to recover as much of the loan as possible. 

Additionally, many loans have PMI (Private Mortgage Insurance) that will cover a portion of their loss so the mortgager's motivation to reach an agreement may be less because they're covered regardless. You may have to start negotiating with the PMI company, adding additional time to the sale process. Unless...