Selling Your Home - Distressed Properties
Yes, in some case you can sell your home for less than what you still owe on the mortgage, but this is complicated and depends on the lender. This situation is known as a "short sale." Sometimes a lender will be willing to split the difference between the sale price and loan amount, which must still be paid. A short sale may be more complicated if the loan has been sold to the secondary market, because then the lender will have to get permission from Freddie Mac, the two major secondary-market players. If the loan was a low-down payment mortgage with private mortgage insurance, then the lender also must involve the mortgage insurance company that insured the low-down loan.
What is a Short Sale?
The term "short sale" indicates that a property for sale will be subject to the lender accepting less than is owed on the loan. as the total indebtedness exceeds the current market value. Thus the homeowner is offering the property for sale subject to the lenders approval, as the lender must agree to accept less than is owed for the sale to be completed.
In addition to the outstanding loans, some properties in this category have also become "nonperforming," meaning that the borrower has stopped making payments. Thus the total due at closing includes back payments, penalties, possibly delinquent property taxes, unpaid homeowner association dues, etc. These costs plus escrow and title fees, selling commissions and other closing costs must be paid to allow the sale to proceed to completion. Anyone in the transaction can assume these costs (the buyer, seller or lender) to facilitate the sale. This becomes the subject of negotiation.
When Does Foreclosure Begin?
Lenders will initiate foreclosure proceedings when borrowers become delinquent in their mortgage obligations, usually after three payments are missed. The lender will then notify the borrower in writing that he or she is in default. The lender can request a trustee's sale or a judicial foreclosure, in which the property is sold at public auction. A borrower can cure the default by paying the overdue amount and the pending payment after the notice of default is recorded, usually no later than a few days before the property's sale. Some sales allow the successful bidder to take possession of the property immediately. If the former owner refuses to vacate the premises, the court can issue an unlawful detainer that allows the sheriff to come out and evict them. Borrowers should do everything they can to avoid foreclosure, which is one of the most damaging events that can occur in an individual's credit history.
What is an REO?
REO stands for "real estate owned," signfying that the property is owned by the lender. Thus, such properties have already gone through the foreclosure process and there are established price and terms for a purchase. Buyers can treat those properties in much the same way as other non-distressed properties with the following differences. The owner/lender in REO sales did not occupy the property. Therefore the lender is not required to provide some of the normal disclosures to buyers of the property. Most notable is the lack of a Transfer Disclosure Statement which in normal situations advises buyers of conditions known to an owner such as past repairs.
Agents involved in the transaction still must do their walk-through to report to the buyer in writing any observed defects and "red flags" and other required disclosures are also provided, such as the Natural Hazard Disclosure and report.