What If a Foreclosure Sale Started but You Sell Your House in a Short Sale?
When a debtor first takes out a loan, the loan agreement requires that the debtor provide some type of collateral for the loan. The exception may be very well-funded organizations or individuals with a high income, but for nearly all borrowers, creditors will require some type of collateral. For mortgages, this collateral is the property that the debtor is buying. A foreclosure is simply a legal process to seize possession of this property to recover profit lost on a defaulted loan.
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Foreclosure Sale
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Creditors spend several months going through the foreclosure process. During this time they advance the foreclosure action through a local court and send legal notices to debtors warning them they will be forced out of their house. Eventually, after deadlines have been met, the court will issue an eviction notice and award the property to the creditor. An auction is held to sell the property to any interested investor. If the auction fails, the property passes into the possession of the creditor fully, and the creditor must sell the property on the open market.
Short Sale
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A short sale is an intervening action, an arrangement that the creditor and debtor reach in lieu of a foreclosure. The debtor admits and shows proof that the loan cannot be paid back, and the creditor agrees to allow the debtor to sell the house and use the funds to pay back the loan. The creditor oversees the sale and confirms the price based on previous expectations. This gives the debtor time to plan new living arrangements and help pay back a large amount of their debt. The creditor may either forgive any remaining debt, or still require the debtor to pay it back.
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Short Sale Agreement
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A short sale is designed to stop the foreclosure process. The two do not happen at the same time: this is why it is so important for the debtor to contact the creditor as soon as possible after missing payments and arranging alternatives like a short sale. If the creditor is expecting a short sale, it will halt any foreclosure proceedings and instead focus on the short sale. Creditors tend to lose money in the foreclosure market, and will often agree to an alternative short sale. The function of the short sale automatically freezes foreclosure proceedings.
Deadlines
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Ideally, every short sale takes care of a foreclosure problem, but issues remain. Banks are very large, and short sale departments are often separated from foreclosure departments. In application, the two can go on at the same time simply because the bank has not confirmed the short sale and the foreclosure department does not know about it. If the short sale is a very late decision, the foreclosure sale may have already been conducted. If the property was sold to an investor then the bank will not be able to complete the short sale process.
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