Foreclosure is a significant financial event that can have lasting consequences, including its impact on your credit report. But just how long does a foreclosure stay on your credit report, and what does it mean for your financial future? Let’s delve into the details:
How Long Does Foreclosure Stay on Your Credit Report?
Foreclosure remains on your credit report for seven years from the date of the initial missed payment that led to the foreclosure. This means that even after the foreclosure process is completed and the property is sold, the negative mark will continue to affect your creditworthiness for several years.
Understanding the Impact of Foreclosure on Your Credit:
Foreclosure is considered one of the most damaging events for your credit score. It can significantly lower your credit score, making it challenging to qualify for new loans, credit cards, or favorable interest rates. Additionally, lenders may view you as a higher credit risk, leading to potential denials or higher borrowing costs.
How Does Foreclosure Compare to Other Negative Items?
While foreclosure is a severe negative mark on your credit report, its impact may lessen over time, especially if you take steps to rebuild your credit. Compared to other negative items like late payments, collections, or bankruptcies, foreclosure typically has a more prolonged effect on your credit score.
Rebuilding Your Credit After Foreclosure:
Despite the challenges posed by foreclosure, it’s possible to rebuild your credit over time. Here are some steps you can take to improve your creditworthiness:
Pay Bills on Time: Consistently paying your bills on time is one of the most effective ways to rebuild your credit. Set up automatic payments or reminders to ensure you never miss a due date.
Reduce Debt: Lowering your overall debt burden can improve your credit utilization ratio, a key factor in determining your credit score. Focus on paying down existing debts and avoiding new debt whenever possible.
Establish Positive Payment History: Opening new credit accounts and using them responsibly can help demonstrate your creditworthiness. Consider applying for a secured credit card or becoming an authorized user on someone else’s account to establish positive payment history.
Monitor Your Credit Report: Regularly review your credit report to check for inaccuracies or discrepancies. Dispute any errors you find to ensure your credit report accurately reflects your financial history.
Conclusion:
While foreclosure can have a significant impact on your credit report, it’s not the end of your financial journey. By understanding how long foreclosure stays on your credit report and taking proactive steps to rebuild your credit, you can overcome this setback and work towards a brighter financial future. Remember, patience, diligence, and responsible financial habits are key to improving your creditworthiness over time.
Foreclosure means the lender takes back a home if the borrower can’t pay the mortgage. There are two main ways: judicial and nonjudicial. Let’s see how they’re different:
Judicial Foreclosure:
Court Involvement: The lender sues the borrower in court for not paying the mortgage.
Court Decision: If the court agrees, it allows the foreclosure.
Auction: The house is sold to the highest bidder at a public auction to pay off the debt.
Redemption: In some places, the borrower can buy back the house within a certain time after the sale.
Nonjudicial Foreclosure:
No Court: The lender follows the rules in the mortgage contract, not the court.
Notice of Default: The lender tells the borrower they’ll take the house if they don’t pay.
Notice of Sale: After waiting, the lender announces the auction date.
Auction: The house is sold, and the money goes to pay off the debt.
No Redemption: Usually, the borrower can’t buy back the house after it’s sold.
Key Differences:
Court Role: Judicial foreclosure involves the court, while nonjudicial doesn’t.
Time and Process: Judicial takes longer because of court stuff, while nonjudicial is quicker.
Redemption: Only judicial foreclosure may give the borrower a chance to buy back the house.
State Rules: Whether you get judicial or nonjudicial foreclosure depends on where you live and what’s in your mortgage contract.
In short, both ways achieve the same thing, but they follow different rules and timelines. Understanding these differences helps homeowners and lenders deal with foreclosure better. If you’re facing foreclosure, talking to a real estate lawyer can help you explore your options.
Florida is known as a lien theory state where the property acts as security for the underlying loan. The document that places the lien on the property is called a mortgage.top
How are Florida mortgages foreclosed?
In Florida, the lenders go to court in what is known as a judicial foreclosure proceeding where the court must issue a final judgment of foreclosure. The property is then sold as part of a publicly noticed sale. The court with jurisdiction over a foreclosure is known as the Circuit Court. A complaint is filed in Circuit Court along with what is known a lis pendens. A lis pendens is a recorded document that provides public notice that the property is being foreclosed upon.top
What are the legal instruments that establish a Florida mortgage?
The documents are known as the mortgage, note, and in a commercial transaction, a security agreement. Sometimes the mortgage document is combined with the security agreement. A mortgage is filed to evidence the underlying debt and terms of repayment, which is set forth in the note.top
How long does it take to foreclose a property in Florida?
Depending on the court schedule, it usually takes approximately 180-200 days to effectuate an uncontested foreclosure. This process may be delayed if the borrower contests the action, seeks delays and adjournments of hearings, or files for bankruptcy.top
Is there a right of redemption in Florida?
Florida has a statutory right of redemption, which allows a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs. There is a time limit to undertake such redemption.top
Are deficiency judgments permitted in Florida?
Yes, a deficiency judgment may be obtained when a property in foreclosure is sold at a public sale for less than the loan amount that the underlying mortgage secures. This means that the borrower still owes the lender for the difference between what the property sold for at auction and the amount of the original loan.top
What statutes govern Florida foreclosures?
The laws that govern Florida foreclosures are found in F.S. 702.01 et. seq.
Short sales and foreclosures can hurt your credit—here’s how
Credit scores can predict how likely you are to make timely payments, pay off loans, and help a lender understand how “risky” you are as a borrower. Your credit score is based on your lending history and your ability to manage and repay debts as agreed.
Financial slip-ups impact your score, such as failing to make timely payments or letting your mortgage payment slide. If you suffer a short sale or foreclosure, your credit score will suffer too—you’re a potential increased risk for a lender.
If you’re considering a short sale or foreclosure for your home, here’s how much your credit score could drop, how long a foreclosure or short sale will stay on your credit report, and what you can do to reduce the damage.
What Is a Short Sale?
A short sale allows you to sell your home and use the sale proceeds to pay off your mortgage—even if those proceeds don’t amount to the full loan balance. Because lenders often take a financial loss on short sales, this isn’t an option in every situation. You’ll need to reach out to your mortgage lender or servicer directly to inquire if a short sale is possible and any associated requirements.
“Most banks would prefer that a homeowner who has fallen behind on their payments or can no longer afford their home move forward with a short sale,” Yawar Charlie, a Los Angeles-based real estate agent, told The Balance via email. “It is more cost-effective for the lender, and faster.”
A “deficiency” after is the difference between your mortgage and your property’s value. You may be responsible for the deficiency (depending on your state), or your lender may waive this amount, freeing you from responsibility for the difference.
What Is a Foreclosure?
If you fail to make your mortgage payments, you may face foreclosure when the lender seizes your property and sells it to make up for their financial losses. It typically takes four missed payments (after 120 days) to kick off foreclosure proceedings.1
The exact foreclosure process varies by state, but you should receive notice in the mail if a foreclosure is headed your way.
Open and read all letters from your lender or servicer, and consider federal government assistance in avoiding foreclosure.
How a Short Sale Affects a Credit Score
According to Tony Wahl, director of operations at online credit analysis platform Credit Sesame, short sales (as well as foreclosures) should be considered “a last resort.”
“The short sale process is complicated, lengthy, and will have negative ramifications for a homeowner’s credit and finances,” Wahl said in an email to The Balance.
How much can a short sale impact credit, though? Data from the Fair Isaac Corporation (FICO) shows short sales can reduce a consumer’s credit score anywhere from 50 to 160 points, depending on where their credit started. For short sales, the impact is more significant when there’s a deficiency balance.2
The impact is more noticeable for consumers with good credit—meaning a high score or few debts and overdue payments—than someone with an already low score. For example, someone with a higher score could see their credit score drop up to 20% in the worst-case scenarios, while a short-seller with a lower score might only see a 15% drop in the same situation.2
A short sale could stay on your credit history for anywhere between three to seven years.2 However, consumers with a short sale on their record may be able to buy again in just two years in certain circumstances.3
“When it comes time for that consumer to buy a new home, most mortgage lenders will be more lenient with a prior short sale than with a prior foreclosure,” Wahl said.
If you think you’ll buy another home sometime in the future, be sure to get a letter from your lender confirming the short sale, which could help you qualify for a new loan.
How a Foreclosure Affects a Credit Score
Foreclosures have a slightly worse impact on credit score, according to FICO. Depending on their starting score, most homeowners who suffer a foreclosure see their credit scores drop between 85 and 160 points, or about 12% to 20%.2
For example, someone with a “good” starting score of 680 could decrease to between 575 and 595, which is in the “poor” to “fair” score ranges. Someone with a “very good” score of 780 may decrease to between 620 and 640, or the “fair” score range.
A foreclosure can impact a consumer’s credit for up to seven years. Of the 7 million-plus Americans who experienced foreclosure between 2004 and 2015, a little over half still had a credit score rating falling into the “poor” range at the end of 2015.4
Mortgage loan qualification is difficult with a foreclosure on your record, and can mean waiting as much as seven years to buy a new home. A foreclosure won’t be removed from your credit history until seven years after the first missed payment.
Late Payments and Your Credit Score
Late payments have one of the most significant negative impacts on credit score. Late mortgage payments could lead to a double-whammy on your credit score, impacting it long before your short sale or foreclosure happens.
“In both circumstances, the lender will be reporting your late or missed payments,” Charlie said. “Therefore, your credit score will already be negatively impacted—and most late payments take several years to fall off your credit report.”
According to FICO, falling just 30 days behind on your mortgage can result in a credit score drop of up to 110 points. At 90 days, the decrease could go up to 130 points.2
Rebuild Your Credit After a Short Sale or Foreclosure
A short sale or foreclosure doesn’t cause permanent credit damage. Though it takes time, there are ways to improve your score and your future financial options.
According to Wahl, you should aim to make consistent monthly payments on any other debts.
“Remind yourself that this is a long game and will take time,” he said.
In the meantime, you can request help from the National Foundation for Credit Counseling or another nonprofit credit counseling agency. Counselors can walk you through your options for improving your credit and help you toward recovery from your short sale or foreclosure.
Poor credit can make it harder for you to get a mortgage, an apartment, or a credit card. It can also put you on the hook for higher interest rates, which can make the loans and credit lines that you do obtain more expensive to repay.1
If you have fair or bad credit, defined as a FICO score of 669 or below, you may be wondering how to increase your credit score. As hopeless as the situation might seem now, poor credit doesn’t have to last forever. There are steps you can take right now to begin raising your credit score.
Get a Copy of Your Credit Reports
Before you can figure out how to increase your credit score, you have to know what score you’re starting from. Since your credit score is based on the information in your credit report, the first place you should go to improve your credit score is your credit report.2
A credit report is a record of your repayment history, debt, and credit management. It may also contain information about your accounts that have gone to collections and any repossessions or bankruptcies.3
Order copies of your credit reports from each of the three major credit bureaus to identify the accounts that need work. You can get free copies of your credit reports every 12 months from each of the major bureaus through AnnualCreditReport.com.
Dispute Credit Report Errors
Under the Fair Credit Reporting Act, you have the right to an accurate credit report.4 This right allows you to dispute credit report errors by writing to the relevant credit bureau, which must investigate the dispute within 30 days.5
Errors, which can stem from data entry snafus by creditors, easily interchangeable Social Security numbers, birthdays, or addresses, or identity theft, can all hurt your credit score.6
For example, if you already have a history of late payments, an inaccurately reported late payment on the report of someone could have a dramatic and fairly immediate negative impact on your score because late payments represent 35% of your credit score. The sooner you dispute and get errors resolved, the sooner you can start to increase your credit score.7
Avoid New Credit Card Purchases
New credit card purchases will raise your credit utilization rate—a ratio of your credit card balances to their respective credit limits that makes up 30% of your credit score.8 You can calculate it by dividing what you owe by your credit limit. The higher your balances are, the higher your credit utilization is, and the more your credit score may be negatively affected.
Under the FICO score model, it’s best to keep your credit utilization rate below 30%. That is, you should maintain a balance of no more than $3,000 on a credit card with a limit of $10,000.9 To meet that 30% target, pay cash for purchases instead of putting them on your credit card to minimize the impact on your credit utilization rate. Even better, avoid the purchase completely.
Pay off Past-Due Balances
Your payment history makes up 35% of your credit score, which makes it the most important determinant of your credit.8 The further behind you are on your payments, the more it hurts your credit score.
Once you’ve curbed new credit card spending, use the savings to get caught up on your credit card payments before they are charged off (the grantor closed off the account to future use) or sent to a collections agency.10
Do your best to pay outstanding balances in full; the lender will then update the account status to “paid in full,” which will reflect more favorably on your credit than an unpaid account.11 In addition, continuing to carry a balance as you slowly pay off an account over time will subject you to continued finance charges.12
Avoid New Credit Card Applications
As long as you’re in credit repair mode, avoid making any new applications for credit. When do apply for new credit, the lender will often perform a “hard inquiry,” which is a review of your credit that shows up on your credit report and impacts your credit score.13
How many credit accounts you recently opened and the number of hard inquiries you incurred both reflect your level of risk as a borrower, so they make up 10% of your credit score. Opening many accounts over a relatively short period can be a red flag to lenders that a borrower is in dire financial straits, so it can further decrease your score.8 In contrast, having few or no recently opened accounts indicates financial stability, which can boost your credit score.
Leave Accounts Open
It’s rare that closing a credit card will improve your credit score. At the very least, before you close an account, ensure that it won’t negatively affect your credit. You might be tempted to close credit card accounts that have become delinquent (past due), but the outstanding amount due will still up on your credit report until you pay it off. It’s preferable to leave the account open and pay it down every on time each month.14
Even if your card has a zero balance, closing it can still hurt your credit score because credit history length makes up 15% of your credit score. Credit history length factors in the age of your oldest account and most recent account as well as the average age of all accounts. In general, the longer you keep accounts open, the more your credit score will increase.8
Contact Your Creditors
They might be the last people you want to talk to, but you’d be surprised at the help you might receive if you call your credit card issuer. If you’re having trouble, talk to your creditors about your situation.
Many of them have temporary hardship programs that will reduce your monthly payments or interest rate until you can get back on your feet. If you alert them to the possibility that you might miss an upcoming payment, they may even be able to establish a mutually beneficial arrangement.15 These courtesies may allow to make progress in paying down outstanding balances and eventually raising your credit score.
Pay off Debt
Your amount of debt that you’re carrying as a proportion of your overall credit represents 30% of your credit score, so you’ll have to start paying down that debt to raise your credit.82
If you have a positive cash flow, meaning you earn more than you owe, consider two common methods for paying down debt: the debt avalanche method and the debt snowball method. With the avalanche method, you first pay off the credit card with the highest APR with your extra money. Make minimum payments on other cards, and use any leftover funds toward the high-interest card. When you pay off that card, move to the next-highest APR card and repeat.16
The snowball method requires you to make minimum payments on every card, every month. You then use any extra funds to pay down the card with the lowest balance. Once that one is paid off, apply extra money to the card with the next lowest balance, but continue to make minimum payments on the other cards.
If, however, you owe more than you make, you’ll need to get creative about coming up with the extra money you need to pay off your debt. For example, you could drive for a ride-sharing service or sell some things on an online auction website for extra cash. It will take some sacrifice, but the financial freedom and the credit score points you’ll gain will be worth it.
Get Professional Help
If you are overwhelmed by your credit situation or monthly expenses, you live paycheck to paycheck, or are confronting bankruptcy, consumer credit counseling agencies are available to assist you. Certified credit counselors can help you create a budget, put together a debt management plan, and get your finances in order.17
Of course, the key is to find a reputable one. Locate a trustworthy credit counseling agency through the National Foundation for Credit Counseling, the longest-running non-profit organization. Or, locate a credit counselor using the search feature of the U.S. Trustee Program offered through the U.S. Department of Justice. You can always simply refer to your credit card billing statement for a phone number to call if you’re experiencing trouble making your payments.18
Be Patient and Persistent
Patience isn’t a factor that’s used to calculate your credit score, but it’s something you need to have while you’re repairing your credit. Your credit wasn’t damaged overnight, so don’t expect it to improve in that amount of time. Continue monitoring your credit, keeping your spending in check, and paying your debts on time each month, and over time you will see a boost in your credit score.
Understand the process that allows a bank to take your house
Foreclosure is the process that lenders use to take back a house from borrowers who can’t pay their mortgages. By taking legal action against a borrower who has stopped making payments, banks can try to get their money back. For example, they can take ownership of your house, sell it, and use the sales proceeds to pay off your home loan.1 Understanding why foreclosures occur and how they work can help you navigate, or preferably avoid, the complex process.
Why Foreclosures Occur
When you buy expensive property, such as a home, you might not have enough money to pay the entire purchase price at once. However, you can pay a small percentage of the price up front, usually anywhere from 3% to 20% of the price, with a down payment, and borrow the rest of the money, to be repaid in future years.23
However, the rest of the money may still amount to hundreds of thousands of dollars, and most people don’t earn anywhere near that much annually. Therefore, as part of the loan agreement, you will agree that the property you’re buying will serve as collateral for the loan.4 If you stop making payments, the lender can foreclose on the property—that is, repossess it, evict you, and sell the property used as collateral (in this case, the home) in order to recover the funds they lent you that you cannot repay.15
To secure this right, the lender places a lien on your property.6 To improve their chances of recouping the money that they lend, they (usually) only lend if you’ve got a good loan-to-value (LTV) ratio, a number that represents the risk that the lender will take in granting someone a secured loan, such as a mortgage. To calculate the ratio, the lender divides your loan amount by the value of the home and then multiples the result by 100 to get a percentage. Lenders view an LTV ratio of 80% or less to be ideal.7
If you have an LTV ratio that exceeds 80%, you will generally require Private Mortgage Insurance (PMI), which can add tens of thousands of dollars to the amount you pay over the loan term.
How Foreclosures Work
Foreclosure is generally a slow process. If you make one payment a few days or weeks late, you’re probably not facing eviction. However, you may face late fees in as little as 10 to 15 days.8 That’s why it’s important to communicate with your lender as early as possible if you’ve fallen on hard times or expect to in the near future—it might not be too late to avoid foreclosure.
The foreclosure process itself varies from lender to lender and laws are different in each state; however, the description below is a rough overview of what you might experience.5 The entire process could take several months at a minimum.
Notices start. You will generally start to receive communications as soon as you miss one payment, and those communications might include a notice of intent to move forward with the foreclosure process. In general, lenders initiate foreclosure proceedings three to six months after you miss your first mortgage payment. Once you’ve missed payments for three months, you may be given a “Demand Letter” or “Notice to Accelerate” requesting payment within 30 days. If, by the end of the fourth month of missed payments, you still have not made the payment, many lenders will consider your loan to be in default and will refer you to the lender’s attorney.9 This is when things get critical. Read all of your notices and agreements carefully and speak with an attorney or a U.S. Department of Housing and Urban Development (HUD) housing counselor to stay in the know.
A judicial or nonjudicial foreclosure ensues. When it comes to foreclosure proceedings, there are two types of states: judicial and nonjudicial states. In judicial states, your lender must bring legal action against you in the courts to foreclose. This process takes longer, as you often have 30 to 90 days in between each event. In nonjudicial states, lenders can foreclose based on the “power of sale” clause in the agreements you’ve signed with them, and a judge is not involved.5 As you might imagine, things move much faster in nonjudicial states. But in either type of state, you will be given written notice to make payment followed by a “Notice of Default” and a “Notice of Sale.”You can fight the foreclosure in court; in a judicial state, you’ll generally be served with a summons, whereas in a nonjudicial state, you’ll need to bring legal action against your lender to stop the foreclosure process.10 Speak with a local attorney for more details.
You can stop the process. In certain states, lenders are required to offer borrowers the option to reinstate the loan and stop the foreclosure process. Whether or not those options are realistic or feasible is another matter. Lenders might say that you can reinstate the loan anytime after the “Notice of Sale” up until the foreclosure date (the sale date) and stay in the home if you make all (or a substantial portion) of your missed payments and cover the legal fees and penalties charged so far. You might also have an opportunity to pay off the loan in its entirety, but this may only be feasible if you manage to refinance the home or find a substantial source of money.11
Be prepared for an auction and eventual eviction. If you’re unable to prevent foreclosure, the property will be made available to the highest bidder at an auction that either the court or a local sheriff’s office runs. If nobody else buys the home (which is common), ownership goes to the lender. At that point, if you’re still in the house (and haven’t made arrangements to protect the house), you face the possibility of eviction, and it’s time to line up new accommodations. Local laws dictate how long you can remain in the house after foreclosure, and you should receive a notice informing you of how long you can stay. Ask your former lender about any “cash for keys” incentives, which can help ease the transition to new housing (assuming that you’re ready to move quickly).12
Get a second chance through a redemption. Many states offer what is known as redemption, a period after the foreclosure sale occurs when you can still reclaim your home. The “Notice of Sale” will generally inform you about the redemption period, and timeframes vary by state. You generally must be willing to pay the loan balance that you owe and any costs associated with the foreclosure process to reclaim in the home.13
It often takes four months after you miss your first payment before you are officially in default of your loan.
Consequences of a Foreclosure
The main outcome of going through foreclosure is, of course, the forced sale and eviction from your home. You’ll need to find another place to live, and the process could be extremely stressful for you and your family.
How foreclosures work also makes them expensive. As you stop making payments, your lender may charge late fees, and you might pay legal fees out of pocket to fight foreclosure.9 Any fees added to your account will increase your debt to the lender, and you might still owe money after your home is taken and sold if the sales proceeds are not sufficient (known as a “deficiency”).14
A foreclosure will also hurt your credit scores. Your credit reports will show the foreclosure starting a month or two after the lender initiates foreclosure proceedings, and it will stay on the report for seven years. You’ll have a hard time borrowing to buy another home (although you might be able to get certain government loans within one to two years), and you’ll also have difficulty getting affordable loans of any kind.15 Your credit scores can also affect other areas of your life, such as (in limited cases) your ability to get a job.
How to Avoid a Foreclosure
The act of taking back your home is the last resort for lenders who have given up hope of being paid. The process is time-consuming and expensive for them (although they can try to pass along some of those fees to you), and it is extremely unpleasant for borrowers. Fortunately, you can follow some tips to prevent foreclosure:
Keep in touch with your lender. It’s always a good idea to communicate with your lender if you’re having financial challenges. Get in touch before you start missing payments and ask if anything can be done. And if you start missing payments, don’t ignore communication from your lender—you’ll receive important notices telling you where you are in the process and what rights and options you still have. Speak with a local real estate attorney or HUD housing counselor to understand what’s going on.
Explore alternatives to keep your home. If you know that you won’t be able to make your payments, find out what other options are available to you. You might be able to get help through government foreclosure-avoidance programs.16 Some lenders offer similar programs to those willing to fill out a mortgage assistance application.17 Your lender might even offer a loan modification that would make your loan more affordable. Or, you might be able to work out a simple payment plan with your lender if you just need relief for a brief period (if you’re in between jobs, or have surprise medical expenses, for example).
Look into alternatives for leaving your home. Foreclosure is a long, unpleasant, expensive process that damages your credit. If you’re simply ready to move on (but want to at least try to minimize the damage), see if your lender will agree to a short sale, which allows you to sell the house and use the proceeds to pay off your lender even if the loan hasn’t been completely repaid and the price of the home is less than what you owe on the mortgage. However, you may still have to pay the deficiency unless you have it waived.18 If that doesn’t work, another less attractive option is a deed in lieu of foreclosure, which allows you to reduce or even eliminate your mortgage balance in exchange for turning over your property to the lender.19
Consider bankruptcy. Filing for bankruptcy might temporarily halt a foreclosure. The issues are complex, so speak with a local attorney to get accurate information that’s tailored to your situation and your state of residence.
Avoid scams. Because you’re in a desperate situation, you’re a target for con artists. Be wary of foreclosure rescue scams, such as phony credit counselors or individuals who ask you to sign over the deed to your home, and be selective about whom you ask for help.20 Start seeking help from HUD counseling agencies and other reputable local agencies.
A short sale is a real estate transaction that occurs when a homeowner sells a property for less than they owe on the mortgage, and the lender approves of the “short” payoff.
Understand what a short sale involves, how it differs from a foreclosure, and its alternatives to decide whether it’s the right approach to get out from under your mortgage.
What Is a Short Sale?
A short sale is any property sale where the proceeds of the sale fall “short” of the original loan amount. It occurs when a seller sells a property for less than the balance of their loan, and the lender agrees to accept less than the amount originally due to them after all costs of the sale.
Short sales are commonly initiated by distressed homeowners who are underwater on their mortgages (the loan balance exceeds the home’s fair market value) and can’t afford or otherwise keep the home but want to avoid foreclosure. But they can also occur if the accepted sale price on a home is higher than the mortgage but not high enough to pay all closing costs and commissions.
In a successful short sale, the lender typically agrees to release the lien on the property in exchange for receiving the loan payoff. It may either forgive the “deficiency” or difference between the original loan balance and payoff or make a plan with the seller to settle the remaining debt.1 In either case, since the lender will be receiving a short payoff in such a transaction, it must agree to grant a short sale, and will generally only do so if it will benefit the lender’s bottom line. If the lender doesn’t view the homeowner or property as a good fit for a short sale, it may disapprove of the sale.
How a Short Sale Works
A legitimate short sale must be an arm’s length transaction involving an unrelated buyer and seller and a bona fide lender.2 The following is an example of how the typical short sale unfolds:
A homeowner has a home that’s worth less than what they owe on the mortgage but must sell it as a result of hardship.
The seller enlists an agent to discuss the short sale proposal (known in short sale terminology as the “short sale package”).
The seller’s agent approaches the lender to assess their willingness to entertain the proposal and identify what the lender requires for a short sale.
The seller works with their agent to price the home and put it up for sale.
A buyer’s agent makes the seller an offer on the property.
The buyer and seller negotiate the offer through their respective agents.
The seller’s agent accepts the offer on the seller’s behalf, and both the buyer and seller sign it, subject to the lender’s approval.
The seller’s agent presents the offer to the lender along with the short sale package including the signed purchase contract, a hardship letter explaining why the seller can’t keep the home, and a narrative about the local market trends that support the short sale.
The lender does a “bottom-line” review of the package and eventually responds with approval, refusal, or, in some cases, no response. If the lender refuses the short sale, they’ll often state the net proceeds that would be acceptable for approval. In the case of approval, the lender sends a short sale approval letter to the seller in order to demand the loan payoff in return for releasing the lien.
Escrow closes, and the proceeds are turned over to the lender, not the seller.3
To ensure that the short sale is an arm’s length transaction, the buyer and seller will generally have to sign affidavits confirming that they aren’t related.
Requirements for a Short Sale
There are four essential ingredients for a short sale, which are generally handled by real estate agents who specialize in short sales:
An underwater home: This means that a home has a fair market value that’s less than the remaining balance on the homeowner’s mortgage.
A seller with a hardship: Most lenders view job losses, surprise medical costs, the homeowner’s death, natural disasters, and military service as acceptable hardships for a short sale, to name a few examples.3 Whatever the hardship, it should serve as a clear impetus for the homeowner to sell “short.”
A willing lender: There’s no point in proceeding if the lender refuses the possibility of a short sale in no uncertain terms, which happens rarely. The lender should at least be willing to entertain a short sale proposal, but the more proactive and committed they are to the seller’s agent’s initial approach, the smoother the transaction is likely to be.
A qualified buyer: Buyers should ideally be prequalified or preapproved, free of excessive contingencies, and flexible with regards to closing.
Lenders generally don’t consider the mere fact that you have an underwater mortgage to be a qualifying hardship for a short sale.
Short Sale vs. Foreclosure
Both short sales and foreclosures provide homeowners with a means to dispose of a property they can’t keep. However, a short sale is a pre-foreclosure transaction that takes place when you sell a home for less than you owe. A foreclosure occurs when a lender repossesses your home after you fail to make the required payments.
A short sale is generally a voluntary, cooperative undertaking with a lender that allows you to settle debts or have them forgiven in order to avoid the more aggressive, and, in some cases, unwanted, act of repossession by the lender in foreclosure. Borrowers prefer them because they may not damage their credit score as much a foreclosure; moreover, they can get back on their feet faster because they can buy a new home in as little as two years after a short sale compared to seven years after a foreclosure.4 Short sales also take less time, up to 10 months compared to the foreclosure timeline of as long as one year.53 Lenders also favor short sales given their lower costs.
Short Sale
Foreclosure
Allows borrowers to settle debts or have them forgiven by lenders
Results in repossession of the borrower’s home
Takes up to 10 months
Takes up to one year
Can have a less negative impact on credit
Can have a more negative impact on credit
Allows you to get a new mortgage within two years
Requires you to wait as long as seven years to get a new mortgage
Alternatives to a Short Sale
If you’re underwater on your mortgage and can’t keep the home, a short sale may seem like the only way to avoid foreclosure. But other foreclosure alternatives may be available to you.
Discuss your situation with your lender to determine whether you’re eligible for a loan modification wherein the lender changes the terms of the existing loan to eliminate the need for a short sale (for example, by reducing the principal), or a mortgage refinancing (replacing it with a new one).
Key Takeaways
A short sale occurs when the proceeds from a real estate transaction fall short of the original loan balance.
It’s often used by homeowners who are underwater on their mortgages and can’t keep the home but want to avoid foreclosure.
The short sale must be an arm’s length transaction between an unrelated buyer and seller, but it’s usually facilitated by real estate agents and must be approved by a lender.
Short sales are preferable to foreclosures because of their less pronounced impact on credit and shorter timeline, but distressed borrowers should also discuss other foreclosure alternatives with lenders.
Find about your loss mitigation rights, what foreclosure notices you’ll receive, your right to challenge the foreclosure, and more.
When you take out a loan from a bank or mortgage company to purchase a home, in exchange you have to promise to comply with a monthly payment schedule and agree that the lender can sell the property at a foreclosure sale if you fall behind.
If you’re facing a foreclosure, no matter if it is judicial or nonjudicial, don’t panic—you have rights. These rights are based on federal law, state law, and the mortgage (or deed of trust) that you signed when you took out the loan. Read on to find out more about your rights during a foreclosure.
Loss Mitigation Rights
Under federal law, the servicer must contact, or attempt to contact, you by phone to discuss loss mitigation options no later than 36 days after you miss a payment, and again within 36 days after each subsequent delinquency. No later than 45 days after missing a payment, the servicer has to inform you in writing about loss mitigation options that might be available, as well as appoint personnel to help you try to work out a way to avoid foreclosure. (There are some exceptions to some of these requirements, like under some circumstances if you’ve filed bankruptcy or asked the servicer not to contact you pursuant to the Fair Debt Collection Practices Act. To get details, talk to a lawyer.)
Also, the servicer generally can’t officially begin a foreclosure until you’re more than 120 days past due on payments. This time period should provide you with ample opportunity to submit a loss mitigation application to the servicer.
Right to a Breach Letter
Mortgages and deeds of trust typically have a provision that requires the lender to send you a notice—commonly called a “breach letter”—informing you that the loan is in default before the lender can accelerate the loan (call the entire balance due). The breach letter gives you a chance to cure the default and avoid foreclosure.
Notice of the Foreclosure
In all states, you’re entitled to notice of a pending foreclosure. Depending on state law and the circumstances, the foreclosure will be either judicial or nonjudicial.
Judicial Foreclosures
If the foreclosure is judicial, you’ll get a complaint and summons telling you that a foreclosure has started.
Nonjudicial Foreclosures
You also get some kind of notice about a pending nonjudicial foreclosure. You might get a notice of default in the mail, which gives you a limited amount of time to get current and stop the foreclosure. You might also get a notice of sale that lets you know when the sale will happen.
Tip: Always Read Your Mail
If you’re behind in mortgage payments, be sure to pick up any certified or registered mail, even if you have to go to the post office. Also, be sure you read any communications you receive from your servicer. These notices will inform you about deadlines and important dates in the foreclosure process.
If the servicer makes an error and neglects to provide proper notice under state law, you likely have a defense to the foreclosure. You probably won’t be able to derail the proceedings permanently, but you might be able to force the servicer to issue a new notice and start the proceedings over again.
In other states, notice of the foreclosure might consist of publishing information about the sale in a newspaper and posting a notice on the property or in a public location.
Right to Reinstate
State law sometimes allows you to stop a foreclosure by getting current on the loan with a lump-sum payment covering overdue payments, fees, and expenses. You then resume making regular payments. Usually, you must reinstate the loan by a specific deadline, like 5:00 p.m. on the last business day before the sale date or some other deadline.
Also, many mortgages and deeds of trust give you the right to reinstate. Usually, the contract says reinstatement is allowed up until five days before the sale in a nonjudicial foreclosure or up until judgment in a judicial foreclosure. And even if you don’t have the legal right to reinstate, the lender might, after considering the situation, let you reinstate. If the lender refuses your request, consider asking a court to allow you to reinstate. A judge generally won’t want to foreclose if you have enough money to get caught up. Sometimes merely offering to reinstate in front of a judge will embarrass the lender into accepting the reinstatement.
Right to Redeem
All states permit borrowers in foreclosure to redeem the property before the sale, and certain states provide a redemption period after the sale. You would redeem the home by paying the full amount owed to the bank, plus fees and expenses, or by reimbursing the person or entity that bought the property at the foreclosure sale, depending on the situation.
Unfortunately, unless you can get a new loan, either kind of redemption might not be practical if you’re already behind in payments.
Right to Foreclosure Mediation
Some states, counties, and cities give homeowners who are in foreclosure the right to participate in mediation. Mediation brings the borrower and foreclosing lender to the table with the goal of working out a loss mitigation option, like a modification or a short sale.
Right to Challenge the Foreclosure
You have the right to challenge the foreclosure in court. If the foreclosure is judicial, you’ll likely find it easier—and generally less expensive—to simply participate in the existing foreclosure lawsuit. But if the foreclosure is nonjudicial, you’ll have to file your own lawsuit to raise defenses to the foreclosure. If the servicer made a mistake, violated the law, or you want to make the lender prove its case, you might want to fight the foreclosure in court.
Right to a Surplus
After a foreclosure sale, you might get a notice telling you who bought the property and the sale price. If the sale brought in enough to repay the loan, including all foreclosure fees and costs, and any other liens on the property, as well as some extra money, you’re entitled to the excess proceeds, called a “surplus.”
On the other hand, if the foreclosure sale doesn’t fully pay off the debt, you might be on the hook for a “deficiency judgment,” which is a personal judgment against you for the difference between the total debt and a lesser sale price.
Talk to a Lawyer
This article covers many of the rights you have in a foreclosure, but—of course—others exist. Your rights in a foreclosure can vary a great deal depending on your jurisdiction and situation. To get detailed information about your rights, consider talking to a local foreclosure lawyer.
If you’re struggling to pay the property taxes on your home, you could be at risk of losing the property to foreclosure or a tax sale.
If you’re struggling to pay the property taxes on your home, you could be at risk of losing the property to foreclosure or a tax sale. But you might be able to either reduce the amount of property tax that you have to pay or buy yourself some extra time to get caught up on what you owe.
Challenging Your Home’s Assessed Valuation
One thing you can do to reduce the property taxes you have to pay is to challenge the assessed value of your home. The property taxes are primarily based on your home’s assessed value.
All states have specific procedures for challenging—or “appealing”—the assessed value of the home. Typically, you’ll need to dispute the value shortly after you receive the bill. To prevail in your challenge, you must show that the estimated market value placed on your property is either inaccurate or unfair. Also, some states require that you pay the bill before making the appeal. You’ll then typically get a refund if you’re successful in your challenge.
Be sure to follow the procedures carefully otherwise you might lose the appeal. Check the tax assessor’s website online or review your property tax bill to learn about the specific procedures, as well as what sort of documents and evidence you’ll need, to make your challenge to the value the assessor placed on your home.
Abatement, Deferral, and Repayment Programs
Each state has property tax abatement (reduction) or exemption programs that allow certain homeowners to reduce the amount of property tax they must pay based on age, disability, income, or personal status. For example, older homeowners and veterans often are entitled to a reduction of their property taxes. Ordinarily, you’ll have to apply for the abatement and provide proof of eligibility.
In some states, abatement isn’t possible if you’re already delinquent in your tax payments. But you might qualify for:
a deferral (where you’re allowed to postpone paying the taxes if you meet eligibility requirements), or
a repayment plan.
In addition, many states permit the taxing authority to compromise on the amount of taxes that are due or to waive penalties and interest.
Losing Your Home for Failure to Pay Property Taxes
When you don’t pay your property taxes, the taxing authority could sell your home—or its lien on the property—to satisfy your debt. (To get details on how both of these processes work, see What Happens If You Don’t Pay Property Taxes on Your Home?
Or, your mortgage lender might pay the taxes itself and then bill you. If you fail to reimburse the mortgage lender, it might foreclose on your home. If you’re facing a potential foreclosure, consider contacting an attorney to find out about your options.
