With the volatility in the real estate market, an entirely new terminology has been thrown into the already complex process of buying real property. These terms have been used within the industry for quite some time but were not commonplace until recently. The definitions below will assist the home buyer in understanding this new vocabulary.
Bank Owned Homes - The bank or lender foreclosed on the property through a Trustee Sale and now has full ownership of the home. In essence, foreclosure, bank owned homes, and Real Estate Owned (REO) are synonymous with one another.
Foreclosure - A foreclosure is a legal proceeding in which the Mortgage Company (Bank or Lender) terminates their relationship with the homeowner after the homeowner has defaulted on the original terms of the Deed of Trust. The ownership of the home then reverts back to the Mortgage Company. In Arizona real estate, this is known as a non-judicial foreclosure. Once the property is owned by the Mortgage Company, they will attempt to sell the home or parcel of land in the future. The term foreclosure is also referred to as Real Estate Owned (REO) homes or Bank Owned homes.
Loan Modification - The lender, bank, or Mortgage Company who holds the note on the loan agrees to modify the original terms of the loan. An example might be a reduction of the interest rate or changing the length of the loan from 30 years to 40 years. One of the main requirements to qualify for a loan modification is to prove to the lender you have a "hardship". If the lender agrees to modify the loan, they seldom will reduce the principal balance of the original note.
Pre-Foreclosure - A pre-foreclosure occurs when the homeowner is at least 90 days late on their mortgage payment and have been given a Notice of Default by their Mortgage Company. This creates a window of time for the homeowner to bring the loan current, successfully complete a short sale, or have the home sold at a Trustee Sale. The Trustee Sale is an auction typically conducted on the courthouse steps.
Short Sale - In Real Estate, a short sale home is one where the homeowner owes more than the property is currently worth. The homeowner could have one, two, or even three mortgages on the home. The seller or homeowner must make arrangements with their Mortgage Company or companies to accept less than what is owed on the property if the seller decides to sell.
Trustee Sale - A Trustee Sale is an auction open to the public. It is held by the trustee, who acts as a third party on behalf of the lender. The lender is also known as the beneficiary. The lender prepares a credit bid, also referred to as the opening bid. Trustee Sales occur several times throughout any given day. They have specific restrictions and rules that must be followed to the letter of the law, to avoid legal ramifications set forth by the trustee.
The terms and definitions above are the most frequently used when purchasing distressed real estate in today's market. As the real estate market continues to evolve, we are certain to see additional language added in the future.