Few things can strike fear into the heart of a homeowner quite as powerfully as a foreclosure notice. If the fair market value of your home is less than what you owe on the property, you can't escape foreclosure by selling your home through traditional means. With your lender's consent, however, you can avoid foreclosure by selling your home via a short sale. Unfortunately, the bank's approval of your short sale request doesn't guarantee that you won't lose the home to foreclosure.
Banks don't manage all of the company's activity through a single department. Short sales often fall into a situation known as “dual tracking.” During dual tracking, one of the bank's departments works with the homeowner to complete a short sale while another is simultaneously working to foreclose on the home. All banks' policies differ, and your bank may postpone foreclosure proceedings temporarily while you search for a short sale buyer. If your bank practices dual tracking, however, the foreclosure process will continue regardless of whether the bank approves your short sale application.
When a prospective buyer makes an offer on your home, you must submit the offer to your lender for approval before moving forward with the short sale. Although it may seem counterproductive for a lender to foreclose on a home with an approved offer on the table, this scenario does occur.
Whether or not your short sale is cut short by foreclosure depends on two factors: your lender's policies and time. Some lenders will postpone foreclosure proceedings after approving a short sale offer in order to allow the sale to take place. If your lender doesn't postpone foreclosure proceedings, the sale may go through anyway if the foreclosure process takes longer to complete than the short sale.
One of the primary reasons that homes fall into foreclosure, even after the bank approves a short sale, is time. In the recent past, a bank could take months to respond to a homeowner's request for short sale approval and could take weeks to review each offer. The result was that many homes that could have been part of a successful short sale ended up as foreclosures.
In June 2012, new regulations from the Federal Housing Finance Agency changed the way banks process short sales. Banks must review short sale requests within 30 days and have a maximum of 60 days to make a decision. The goal is to speed up the short sale process and reduce the number of foreclosed homes.
Consumer Protection Laws
States have the power to stop banks from foreclosing on homes when a short sale is in progress. In California, for example, the Homeowner Bill of Rights strips banks of the right to foreclose on a property if the bank and all other lien holders have approved the property for a short sale. This gives homeowners the opportunity to market and sell their homes without worrying that the bank will sell the properties at auction before a short sale can close. Laws regulating lender behavior vary. Talk to a licensed real estate attorney in your area for more information about state-specific foreclosure and short sale regulations.
- Bankrate: Can I Stop Short Sale From Going to Auction?
- Don't Foreclose, Sell Instead: Top 100 Foreclosure and Short Sale Questions
- Sun Sentinel: Ask a Real Estate Pro – Will Lender File for Foreclosure During Short Sale Talks?
- CNN Money: New Rules Will Speed Up Short Sales
- Realty Times: Short Sale Dual-Tracking Limited By California Bill
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.