It costs more to the lender to go through the foreclosure process. During a short sale, the lender shares the cost with the homeowner to quickly sell the home. From a financial standpoint, many lenders prefer a short sale if the home is not expected to sell for more than the balance due at the foreclosure auction.
Short sales are less damaging to a credit report than a foreclosure. A foreclosure is when a home is seized and put up for sale by the investor or bank. Every mortgage contract has a lien on the property that allows the bank to control the property if the homeowner stops making mortgage payments.
Banks may reject offers when the price is low, the seller or buyer doesn't qualify, the application is incomplete, or the loan has already been sold.
Short sales don't damage credit ratings as much as foreclosures—but they are still negative credit marks. Foreclosures have a much more negative impact, because they generally stay on credit reports for seven years.
Typically, the bank or lender agrees to a short sale in order to recoup a portion of the mortgage loan owed to them. Short sales are becoming increasingly rare as the economy improves.
Disadvantages of a Short Sale
A short sale comes with quite a few catches. There are more parties involved than a typical sale making the process complicated and often lengthy. In a traditional home sale, price negotiations happen between the buyer and seller (or their representatives), not the seller's bank.
Can You Negotiate A Short Sale? It is entirely possible to negotiate a short sale, but doing so can be a time-consuming process. Instead of negotiating with the seller alone, as is the case with most traditional sales, short sale negotiations must be approved by the lender, too.
Lower prices: One undeniable benefit is that foreclosed homes almost always cost less than other homes in the area or they are listed below market value. This is because they're priced by the lender, who wants the home off of their books.
Since you now know that lenders don't want to foreclose on your property -- and you don't want them to foreclose on you -- you have common ground to work out an agreement that will stop the foreclosure process and satisfy both of your needs. Remember: The bank does not want to foreclose your property.
Lenders do not always lose money in the foreclosure process. It is possible that a lender can make enough money off of interest payments and a foreclosure auction to not suffer a loss, but this is not always the case.
Even when the buyer and the seller have both signed the paperwork -- indicating a binding contract -- only about 40 percent of short sales ever close at all.
Speed up your short sale closing date by making your offer as free of contingencies as possible. Submit your mortgage approval with the offer. Contribute a substantial deposit to show your good intentions.
Why is a foreclosure more likely to have title issues than a non-foreclosure? Borrowers who can't afford loan payments may have taken out other loans against the property.
Foreclosure is a legal process where the borrower repays his debt in full before the term of the loan ends. This helps them in significantly reducing the interest liability and closing down the loan account well before its tenure.
A "deed in lieu" is a transaction in which the homeowner voluntarily transfers title to the property to the bank in exchange for releasing the mortgage (or deed of trust) securing the loan. Unlike with a short sale, one benefit to a deed in lieu is that you don't have to take responsibility for selling your house.
While a bank might be able to make extra money at the auction, usually it just hopes to recover as much money as possible from the sale. The amount of money a bank gets on the foreclosure depends on the winning bid at the auction or the sum it sells the house for post-auction..
Short sales are a mixed bag for the buyer, the seller and the lender. If you're a seller, a short sale is likely to damage your credit — but not as badly as a foreclosure. You'll also walk away from your home without a penny from the deal, making it difficult for you to find and pay for another place to live.
Banks will often refuse to foreclose if the HOA dues are sky-high and the property is worth much less than the balance owed on the mortgage. Plus, the banks have to pay for hazard insurance and taxes. In many cases, it's more of a burden than a boon.
There May Be Hidden Costs and Fees
As previously mentioned, foreclosed home buyers run the risk of assuming liens or debts of the previous owner. However, the new buyer may also be responsible for other costs that may not become apparent until later.
Generally, in real estate investing, the lower the property price means the higher return on investment the property investor receives. Therefore, since foreclosed homes are cheap income properties with low property price, they have a high potential for generating a high return on investment and creating wealth!
What Is A Real Estate Owned Property? A typical real estate owned listing has failed to sell during the foreclosure process and is now owned by a mortgage lender, bank or the mortgage investor. Buying an REO property is done through an REO agent or an auction platform.
With a short sale, the seller is asking the bank to take less than the amount owed. Even if you've made an offer and the seller has accepted it, it's not a done deal. The seller's bank must approve the sale, and this is where the big delays can happen. Banks are losing money in a short sale and aren't too keen on it.
After the seller accepts the offer, the listing agent will send the listing agreement, the executed purchase offer, the buyer's pre-approval letter, a copy of the earnest money check, and proof of funds to the bank.