Understanding the Basics of Short Sale Foreclosure

Short sale foreclosure involves two types of real estate techniques. The first involves real estate that has been repossessed by the mortgage lender. These properties are also referred to as bank owned or real estate owned (REO).

The second type of short sale foreclosure references property which is still in the borrower's possession, but on the brink of foreclosure. Lenders agree to accept less than borrowers owe in exchange for quick sale of the real estate. Short sale options are typically offered after all other options to prevent foreclosure have been unsuccessful.

Currently, banks are holding a large number of non-performing loans; meaning borrowers are not making payments. Banks and mortgage lenders receive money from the Federal Treasury based on their performing loans. When they hold too many non-performing loans, the Feds can cease lending money until their bottom line improves.

By law, banks are limited on the number of REO properties they can own. As more Americans are served with foreclosure papers, many lenders have reached their limit. Short sale foreclosure allows lenders to liquidate a portion of their real estate holdings.

Short sales can remove a huge financial burden from borrowers who do not qualify for refinancing or loan modifications. The process takes between four and nine months to complete. Much depends on the caseload of the bank and if the borrower holds multiple mortgages.

The best short sale foreclosure is known as Payment in Full with Pursuit of Deficiency Judgment. Using this arrangement, the lender accepts the sale price as payment in full towards the mortgage note. The borrower is able to walk away from their property and be released from the mortgage debt.

The worst short sale foreclosure is known as Deficiency Judgment. Many banks hold borrowers accountable for any deficiency between the loan balance and sale price. This amount is usually several thousand dollars. When borrowers hold two or more mortgages, the deficiency amount can be staggering.

When mortgage lenders issue deficiency judgments, borrowers incur several financial consequences. Judgments remain on the borrower's credit report until repaid in full. For most, this can take a lifetime to repay.

Deficiency judgments have far-reaching effects and prevent borrowers from obtaining credit for many years. Borrowers will have very little chance of qualifying for a mortgage loan while the judgment is in place.

Short sale foreclosure will impact borrowers' credit rating. 'Payment in Full' short sales are the least detrimental. Although the black mark remains on credit reports for seven years, borrowers can apply for another mortgage loan within a few years.

Short sale foreclosures are complex and confusing. Borrowers should spend time learning about the different types of short sales, along with the pros and cons of each. Arm yourself with knowledge so you are better prepared to negotiate with your lender.