Foreclosure & Short Sale
In today’s market there are more opportunities than ever for Foreclosures, Short Sales, Tax Sales and we will include Relocation properties here as well. There are some differences that could be important in negotiating a transaction. If you are a Seller in this position it is also very important that you properly negotiate the end result. Let’s take a closer look.
What is a Foreclosure? Foreclosure is the process by which a lien holder (lender or other) may Accelerate (immediate call for all moneys owed, mortgage plus taxes, fees, cost etc.) against an owner that is in “Default” (non-payment of Note). The Mortgage allows the lien holder to gain Title to a property used as collateral so that it can be sold to recoup the money owed. Notice will be served and the property will be offered at a Sheriff Sale. The lien holder will bid up to the amount owed so yes you could outbid the lien holder to obtain the property. When a lender takes back the property it is then called an REO (Real Estate Owned) and would then be listed for sale. See “deficiency” in next section it may also apply to foreclosure.
What is a Short Sale or Preforeclosure? An owner wants to sell a home and between the cost to sell and clear title (pay off all debts against the property) the owner is coming up “short” (owes more than the property is worth). The seller is unable or unwilling to pay the amount short out of pocket to complete a sale. The lender or lien holders may decide that it is a better option to accept the shortage than take a chance on foreclosure. A seller does not have to be in default in order to go short. The amount of the shortage is called “deficiency” (difference between total owed and amount received). The deficiency can be forgiven by the lender or filed as a “Deficiency Judgment” against the owner (still owe the lender the deficiency). The second part of this is the IRS. If the debt or deficiency is forgiven then the IRS may claim that the deficient amount is income and it then becomes taxable.
What is a Sheriff Sale? In PA the Sheriff’s department handles the sale of delinquent properties. This could be for back taxes or default on the loan.
What is a RELO? This is a home offered by a relocation company. The Relo Company may or may not have title but will conduct the transaction as or on behalf of the owner. This is not a foreclosure or anything negative for the owner but these types of sales can be excellent deals. The Relo Company’s usually do all the inspections and repairs upfront and their interest is to transition the owner to a new location usually for work. The owner may list themselves but at some point accept a buyout from the Relo Company. The Relo Company’s goal is not as much about profit from the home as it is about the transfer and many times they will take a loss on the property and you get a great house at a great price.
How does a Foreclosure or short Sale hurt credit? Look for this under the credit repair section.
How long after a Short Sale or Foreclosure until I can get a Mortgage? Below is a list of the waiting periods per FNMA seller guide 03/31/3011
The following waiting period requirements apply:
NOTE: Exceptions for Extenuating Circumstances
- Foreclosure= 7 years, 3 years extenuating 90% max
- Deed-in-Lieu of Foreclosure and Preforeclosure Sale
- 2 years — 80% maximum LTV ratios
- 4 years — 90% maximum LTV ratios
- 7 years — LTV ratios per the Eligibility Matrix
- 2 years extenuating— 90% maximum LTV
- Bankruptcy —Chapter 7 or 11= 4 years, 2 years extenuating
- Bankruptcy —Chapter 13
- 2 years from discharge date
- 4 years from dismissal date, 2 years extenuating from dismissal
Note: The maximum LTV ratios permitted are the lesser of the LTV ratios in this table or the maximum LTV ratios for the transaction per the Eligibility Matrix.
What are Extenuating Circumstances? Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or catastrophic increase in financial obligations. If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).