What Is the Difference Between Bank-Owned and Short Sale?
The amount of people who cannot afford to pay their mortgage has been extraordinarily high since 2008. Terms you may not have heard of before are popping up often in the media, words such as robosigning, bank-owned real estate and short sales. If you are in the market to buy a house or if you already own a home, know what these terms mean.
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Bank-owned Property
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A property that is bank owned is because it has been repossession. The foreclosure process begins when the homeowner misses mortgage payments. When that happens, the bank files a notice of default, a public record document. If the homeowner cannot come up with the money owed during the initial foreclosure process, the house goes to auction, where people can bid on it. If the house doesn't sell at auction, the bank takes it back. The home is now bank owned, also called real estate owned or REO. A house can also be bank owned even if no one owned it. Builders, for example, who can't find buyers for their homes before their construction loan period ends, can lose the house to the bank.
Short Sale
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A short sale, which means selling the house for less than what is owed on it, is an option homeowners may be able to take to avoid a foreclosure. Homeowners who can't afford the mortgage payment can ask the lender to agree to take a loss on the property to avoid going through the lengthy and costly foreclosure process. If the lender agrees, the seller gets out from the mortgage without having a foreclosure, and the lender gets a new homeowner who can make the mortgage payments. If you opt for a short sale, get the terms of the deal in writing. For example, you don't want the lender coming after you later for the deficiency.
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Title Insurance
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If you are thinking about buying a bank-owned property, get owner's title insurance. Because of robosigning, when banks and mortgage lenders hire people to sign documents they didn't read and sometimes didn't even understand, a question arises as to whether the foreclosure is legal. As long as you purchase owner's title insurance, the original owner cannot take the house from you if the foreclosure was determined to be illegal. The wronged party then seeks damages from the lender that foreclosed, not from you, the good-faith buyer.
Short Sale Rules
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Originally, the short sale process could take months to complete. This inefficient process was frustrating for all concerned parties, so the federal government instituted the Home Affordable Foreclosure Alternatives program to help streamline the process. The homeowner may also receive $3,000 to help with relocation costs through the HAFA program.
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- Photo Credit house image by Cora Reed from Fotolia.com
