Decoding the Lingo: Short Sales and Foreclosure

Foreclosure information continues to pepper newspaper headlines like political polls before an election, so it seems right to decode it’s meaning, clarify its scope and discuss one form of foreclosure avoidance, the short sale. 

Foreclosure is the process by which a lending institution (”the bank”) repossesses real property (”the home”) when the home owner fails to make payment on the mortgage.  Foreclosure doesn’t happen when you make a late payment or a check gets lost in the mail.  The process is long and in most cases banks desire to avoid foreclosure, and will work with individuals if they are close to being able to make their mortgages work. That said, foreclosure is happening with increasing frequency all of the country and even in Colorado.  Most people losing their home have a variety of life difficulties stacking up together, however the most commonly blamed cause of a foreclosure has been the adjusting interest rate on their mortgage.  (I’ll do some mortgage decoding soon).  Imagine if your nice $1000 a month payment became $1670 a month and was likely to raise a bit more next year.  When this transition happens and people can’t make their mortgage payments, the bank begins the foreclosure process.  If the foreclosure process completes, the bank owns the home and those foreclosed on have a significantly damaged credit report (not to mention some seriously hurt feelings).  In all, the bank losses a significant amount of money on a foreclosure (compared to someone continuing to make their monthly payments).  This is why one possible remedy to foreclosure is the short sale. 

Short sale is basically selling a house for any amount less than is actually owed on the property and then asking the bank to write off the remainder of the loan as a loss.   An example:  A home purchased for $140,000 has dropped in value by $40,000, but the owner still owes $120,000 to the lender.  A short-sale specialist would pre-negotiate with the bank to accept a short-sale of the property for $100,000 and write off $20,000.   If the bank accepts and the agent finds a buyer at $100,000, then the bank doesn’t have to go through foreclosure and the owner has only a short-sale on their credit report (it is marked as a debt “settled” which is much better than a foreclosure).   A short-sale isn’t easy, but it can save the bank and the home owner significant damage if done well.  In the example above, the bank may be saving between 20 and 40 thousand dollars by not having to sell the property as a bank owned property.  If home owners have second mortgages and are upside down in their homes, short sales provide an important option.  Lenders of second positions mortgages are intensely interested in avoiding foreclosure since they receive nothing in that event (aka. they loose all the money they lent you).