As much as we wish we could, none of us can predict exactly what the future holds, especially when it comes to finances. Unexpected medical bills, job loss, divorce, and everything in between can quickly lead to financial hardship.
In the case of homeowners who have fallen on hard times, if you’re not able to make your monthly mortgage payment, some lenders may offer assistance for a certain amount of time, but eventually you will need to take further action.
A couple of real estate terms you may be familiar with are short sale and foreclosure. Both have similarities, but they are also very different. Of course, each individual’s situation is unique, but we’ll give you a bit of insight into each process.
According to www.bankrate.com, a short sale is when a lender agrees to accept a lower mortgage payoff amount to facilitate the sale of a home where the owner is in financial distress and can’t catch up with payments. The homeowner VOLUNTARILY begins the process of selling their home if a short sale is approved by the lender. Once a buyer is interested, the lender will need to approve the terms for the sale to be facilitated.
When a short sale is approved and the home is sold, that doesn’t mean the homeowner is completely off the hook.
A short sale will likely harm the homeowner’s credit score as they did not fulfill the terms of the loan agreed to. Also, think about it this way, in a situation where a homeowner is selling their home with positive equity, they’re going to walk away with a profit. When they walk away with negative equity, they walk away with nothing, possibly making it hard for you to find another place to live, but not necessarily impossible. In the end, both the lender and the homeowner will likely take a loss, but it may not be as large of a loss as a foreclosure.
Short sales can also be a lengthy process from start to finish depending on the situation. It may be in the homeowner’s best interest to reach out to an attorney or real estate agent before beginning the short sale process.
On the other hand, a foreclosure is defined as the legal process where the homeowner’s lender FORCIBLY takes possession of the home due to delinquency on mortgage payments. The lender then tries to recoup lost costs.
According to the U.S. Department of Housing and Urban Development, mortgage companies usually start the foreclosure process three to six months after the last mortgage payment. If you run into financial hardship, it’s highly recommended that you stay in touch with your lender as there may be alternative solutions rather than going into foreclosure.
Like a short sale, foreclosure not only brings along the threat of losing your home, but several additional consequences as well. This includes damage to your credit score for several years, which ultimately impacts your ability to obtain new housing, credit, and possibly employment until the foreclosure drops off your credit report. According to Experian, that is seven years from the first missed payment.
When it comes to the foreclosure process, there are three different types: judicial, non-judicial, and strict foreclosures.
Judicial Foreclosure: This is the most common type of foreclosure. The lender files suit within the judicial system where the borrower will receive documentation in the mail demanding a payment. If a payment is not made within 30 days, the foreclosure process will begin. The property is then sold to the highest bidder via a local court or sheriff’s office.
Non-Judicial Foreclosure: Also known as statutory foreclosure, this may take place if a Power of Sale clause is included in the mortgage. If the borrower defaults on their loan, the lender will send out a notice demanding payment. After a certain amount of time passes without a payment, the lender will take it upon themselves to hold a public auction. These types of foreclosures tend to take less time to carry out, although they may be subject to judicial review to ensure the legality of proceedings.
Strict Foreclosure: Just a small number of states allow this type of foreclosure. This is when the lender files a lawsuit on the borrower after defaulting on the mortgage. If the borrower is not able to pay the mortgage within a certain time frame ordered by the court, the property goes directly back to the lender. These types of foreclosures usually take place when the debt amount is greater than the property’s value.
Each of these requires the public to be notified as well as all involved parties to receive notice of the proceedings. Once a buyer acquires the property from the bank, the tenants have a short amount of time before eviction takes place.
If you’ve fallen on hard times and are considering either of these options, it’s recommended that you consult your mortgage lender and/or a professional to see what the best course of action is for your situation.
If you have questions, reach out to The Russell Team at (765) 497-0700.