Can I File a Short Sale if a Foreclosure Date Is Set?

Foreclosure is a mortgage lender's contractual right to take a borrower's property if the borrower does not repay the mortgage loan. Foreclosure is a contract right governed by state law. A short sale, like foreclosure, is also a matter of contract. This means that a mortgage lender can agree to a short sale at any time before the foreclosure sale actually occurs.

Process

Foreclosure is a process regulated by state law, so the details vary depending on which state the collateral property is in. In general, the foreclosure process requires several months to carry out. The foreclosure sale date is the final step in that process. The foreclosure process is not complete until the lender actually holds the foreclosure sale.

Title

Until the foreclosure process is fully complete -- until the lender has actually held the foreclosure sale -- the borrower remains on the title to the property. This means the borrower can sell his title to the property at any time before the foreclosure sale. The fact that a mortgage lender has scheduled a foreclosure sale date does not limit the borrower's right to transfer his title.

Short Sale

The catch, however, is that a borrower will transfer title subject to the existing mortgage lien, which means the foreclosure sale date will remain in place even if the borrower sells his title to the property. The new owner will simply lose the property in the foreclosure sale. To avoid this, the borrower can request a short sale approval from the mortgage lender. A short sale means that the lender will release the mortgage lien from the property in exchange for only partial payment on the underlying mortgage loan. For instance, a lender owed $200,000 may agree to accept the short amount of only $180,000 to release the mortgage lien. The borrower negotiates a sales contract for a buyer to pay $180,000 to the mortgage company, and the buyer then obtains free and clear title to the property. A short sale is purely a matter of negotiation between the borrower and the mortgage lender. Neither state nor federal law requires the mortgage lender to approve a short sale proposed by the borrower.

Timing

As long as the lender agrees to the short sale, it is irrelevant whether the lender has or has not scheduled a foreclosure sale date. A lender can also agree to postpone a foreclosure sale date if you are working on a short sale but have not finalized it. The lender can simply push the foreclosure sale date back a week, a month or more to give you time to work out a short sale. Because mortgage lenders are generally not anxious to acquire property in foreclosures, mortgage lenders are often willing to work with borrowers who have a good chance of paying off at least a portion of the mortgage loan.

References

• "Foreclosure Law 101"; Dr. Vook, Ph.D; 2011