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Basically, a short sale is when a Seller will come up short at closing (the difference between the sales price and what is owed). The bank will have to forgive the seller of the debt.
In a foreclosure, the bank has already taken back the property.
A bank agrees to a short sale if they think they can make more money if they sell the property rather than going through the process of foreclosing on the property.
1) What is the difference between the two, in plain terms?
A short sale is what happens when the lender cooperates.
A foreclosure is what happens when they won't.
Quote:
2) What are the advantages to the (lender) for each...
There is no real advantage to the lender; either way they're stuck for a pile.
It's more about how many stinkers they have in a given zip code.
(which is where hiding shadow inventory comes into play)
The simple answer is that it cost money for the bank to go through foreclosure. Once foreclosed, the bank is now responsible for maintaining the property. Either way, the bank isn't going to be getting the full amount that is owed.
A short sale takes less time, and the lender can recoup costs faster. The sellers debt is forgiven, so they're more likely to cooperate in the process. Foreclosure can take a lot of time, and the homes can be recovered in very poor condition.
I took banks a while to figure out it is better for them to cooperate. I looked at a foreclose that they had beaten all the cabinets up, tore the cooper pipe out, broke several windows, and painted all over the walls. Because the seller in a short sale benefits from the debt being forgiven, and less damage to credit rating it benefits both to work to a common goal.
Short sales tend to be better for both parties. The home owner may not have as bad of a credit hit and they have the ability to buy a home sooner after than with a foreclosure. With FHA you can even buy a home one day after a shortsale if there were no missed payment(good luck getting bank to agree to short sale without missing some payments). For the bank it is eaiser and cheaper to do a shortsale, unfortunately the loan server usually stands in the way and they make more money if the home goes to foreclosure so they really tend to work against the lender and the owners best interests. Trying to sell a home with a shortsale has been a nightmare for homeowners in the past with banks dragging their feet on giving an approval/denial of a shortsale offer. Things are suppose to be better now but I have friends who have tried to buy and sell a shortsale hom and the bank took several months to come back with a "no" or a counter offer. When the buyer agreed to the counter offer the bank came back with another counter offer.
A lot of good answers above on the aspect of short sales. OP see you are in North Carolina which is a non judicial state. The timeline for a home to be foreclosed upon in your state can happen after 5 months.
The main problem with a short sale, this does nothing to prevent a home from being foreclosed upon. If you know the property is going to sell, then this is the way to go. If you are already behind a few of months in your state, you need to take action to pause any foreclosure action that may be already be initiated.
In non judicial states - a deed in lieu is better to pursue, 1st the home is listed for sale and after 90 days a loan modification is attempted. If the home does not sell and the home owner doesn't qualify for a modification and home becomes a bank owned property. Technically they can walk free and clear. Time line 6 to 8 months.
Another small note if the mortgage is an FHA loan. Banks will only accept offers at 85% of the loan principle....
My $00.02
Last edited by Modification Specialist; 06-25-2013 at 02:44 PM..
A short sale is what happens when the lender cooperates.
A foreclosure is what happens when they won't.
There is no real advantage to the lender; either way they're stuck for a pile.
It's more about how many stinkers they have in a given zip code.
(which is where hiding shadow inventory comes into play)
the market is full of "off-the-market" inventory. banks cant dump everything they have all at once, if they did i would be one pissed off responsible homeowner. but then it still boggles my mind that i see a boat load of strip malls and new home developments going on around me (5 for rents and for sales on my block alone), and there's nobody to lease or buy this stuff. i think the builders just want to keep building, they probably figure Feds will bail them out if needed. i dont understand it.
Foreclosure - Once you have missed one or two mortgage payments, the lender will begin to send you notices reminding you that you are overdue on your payments. If you don’t make up the payments, the lender will get more aggressive with their notices, and possibly threaten foreclosure. If you still don’t respond, the lender will issue you with a Notice of Default (NOD), which means they have filed for foreclosure. The property will be scheduled for sale by auction. The lender, and all other lien-holders, will be repaid what is owing to them from the auction proceeds, in the order in which the liens were recorded. If there is not enough money to go around, the senior lien-holders are paid out, and the more junior ones get nothing.
Short Sale, I'll give an example - If a borrower owes $200,000 on their mortgage, and receives a purchase offer for $210,000, they would likely still need their lender’s approval to proceed with the sale as a short sale. This is because the closing costs of the sale (agents’ commissions, legal fees, outstanding utilities or tax bills, etc.) would likely total around $25,000. The buyer’s offer of $210,000 is not sufficient to pay back the $200,000 mortgage plus the $25,000 closing costs. The net proceeds to the lender, deducting the closing costs from the sales price, come to $185,000, which is $15,000 short of the $200,000 balance owing.
Now, the most important part, why would your lender approve a short sale?
I'll sum up what it's saying here: When you stop paying your mortgage, and you become delinquent, your mortgage is considered to be “non-performing." Once a mortgage is categorized as “non-performing,” the lender’s aim is no longer to make money. It is now just to lose as little money as possible. Which process will lose them less? Approving a short sale and receiving a discounted mortgage repayment now? Or foreclosing on a home, and paying all of the associated legal costs, and selling that home at some unknown discounted price at some unknown date in the future?
The lending institution is aware that either route, they are going to lose money. They just want to lose as little money as possible.
Basically, a short sale is when a Seller will come up short at closing (the difference between the sales price and what is owed). The bank will have to forgive the seller of the debt.
In a foreclosure, the bank has already taken back the property.
A bank agrees to a short sale if they think they can make more money if they sell the property rather than going through the process of foreclosing on the property.
The bank does not have to forgive anything in a short sale. They still have the option of issuing a bill for the balance due to the owner or creating a new unsecured loan for the balance just to free up the title for the new owner.
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Short Sale v. Foreclosure
