Foreclosures and Short Sales
There are two fundamental ways a homeowner can work through a default on their mortgage. They can either lose the home through a foreclosure, or they can avoid this process and sell the home for less than what is owed on the mortgage. This is called a short sale because the amount the house sells for falls short of covering the entire loan.
For example, a foreclosure and by a short sale realtor in San Diego will affect the homeowner’s credit score negatively. However, a short sale impacts it less severely than a foreclosure. A bank will foreclose on a home in two ways. It will either do it judicially or non-judicially. State laws determine this process.
A judicial process is handled much like a regular lawsuit with a complaint and summons being filed with the court and served on the homeowner. The process culminates in the lender obtaining a judgment against the homeowner.
The property is sold at an auction to pay the judgment. With a non-judicial foreclosure, the process is often quicker, and it does not require that the lender do much more than file a Notice of Default, serve it on the homeowner and pursue a sale of the property if the homeowner cannot reinstate the loan. A reinstatement would require that the homeowner pay all the arrearages to cure the default.
The main difference between a foreclosure and a short sale is that the lender is willing to take less than the amount of the balance due to them. The property is listed on the market usually by a real estate agent with experience in the short sale process. Any real estate agent can register the park, however. The home is then sold to a buyer who agrees to the particular terms outlined in the bank or lender’s sales agreement.
Once the house is sold, the bank receives payment and settles the matter. The homeowner will not receive any proceeds from the sale, but they will be able to have time to move elsewhere and be able to avoid having a foreclosure on their credit report. A short sale has tax ramifications as the balance not paid to the bank is written off and can be viewed as income by the IRS. The owner may or may not have to pay taxes on this amount.
For instance, a home has a mortgage balance of $400,000 on it. The bank agrees to let the homeowner sell the property for $300,000. There is still a balance of $100,000 owed but since the bank is not going to require this sum from the sale of the property, that $100,000 is treated as taxable money.
A foreclosure can be avoided if a bank or lender agrees to let the homeowner make a short sale instead. Of course, if the property can be sold for more than the mortgage amount, the owner can list and sell the property before a foreclosure action takes place. Both foreclosure and a short sale are ways a person who defaults on their mortgage can resolve this matter and move forward.