Foreclosures vs. Short Sale vs. REO

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Almost any option is better than foreclosure Simply stated, do everything you can before foreclosure occurs and do it as quickly as humanly possible. Don’t sit back and keep thinking, “What can I do?” Instead, consider that short sale and check with your lender before your options become more limited.

SHORT SALE – when the home owner owes more than the home is worth and is in a hardship situation financially where a sale must happen (loss of job, divorce, etc.). Just because a seller WANTS to sell does not mean the lender(s) will approve, and a hardship must be demonstrated and documented. While a short sale may save you from foreclosure, it will also have a negative effect on your credit score, frequently lowering it by as much as 200 points.

This can be overcome more quickly than the black mark of a foreclosure, especially if you manage to retain one or two credit cards and keep them current. Perhaps equally distressing, the Internal Revenue Service frequently deemed the difference between the mortgage balance and the amount realized from the short sale to be taxable as income despite the fact that the debtor never saw a dime of it. There is new federal legislation called the Mortgage Forgiveness Debt Relief Act 0f 2007 that just went into effect on January 1st, 2008. The new act essentially eliminates this problem.

A few banks have streamlined the process for submitting a short sale package. These banks might send you their own documents with a bank logo, but it’s not always necessary to complete them, so verify. Following is a list of documents that are generally required by all the banks for short sale submission:

Documents Required for a short sale:

  1. 1. An Executed Listing Agreement.
  2. 2. Fully Executed Purchase Contract.
  3. 3. Seller’s Hardship Letter.
  4. 4. Authorization Letter
  5. 5. Last 2 Bank Statements.
  6. 6. Last 2 Tax Returns.
  7. 7. Last 2 W2’s.
  8. 8. Last two payroll stubs.
  9. 9. An Estimated HUD-1
  10. 10. Additional Documents for Your Short Sale Package
  11. 11. CMA Comparable Market Analysis (listing agent can provide)

FORECLOSURE – once a homeowner reaches a point where s/he cannot pay the mortgage and (normally) is behind 3 payments, a NOTICE OF DEFAULT (NOD) is filed by the lender. Often an owner already has the home on the market as a short sale. Foreclosure proceedings vary from state to state. Of all available options, foreclosure is the worst.

The inevitable result of a foreclosure is the lender taking your house. Not only will you lose your house, but the lender can get a judgment against you for the arrearages you owe plus his costs for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.

REO – Real estate owned properties (also commonly called bank owned properties). If a foreclosure property does not sell, it may be auctioned off. If it is not bought then, the house becomes an REO that is “owned by the bank” and sold BY the bank on the open market.

The One Best Tip I Can Give You: Don’t Do This Alone I have successfully closed many short sale properties. Having a Realtor who knows the process, who to contact and how to handle all of the paperwork to get the deal done is important in order to have a successful short sale.

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