California Real Estate Broker ExaminationFinancingMedium
A homeowner is struggling to make mortgage payments and wants to avoid foreclosure. The lender agrees to allow the homeowner to sell the property for less than the outstanding mortgage balance, with the lender accepting the proceeds as full satisfaction of the debt. What is this process called?
- ALoan Modification
- BShort Sale
- CForeclosure by Judicial Sale
- DDeed in Lieu of Foreclosure
Show answer & explanationAnswer & explanation
Correct answer: B. Short Sale
A short sale occurs when a lender agrees to accept a sale price for a property that is less than the outstanding mortgage balance, rather than going through a full foreclosure process. It benefits both the homeowner (avoiding foreclosure) and the lender (less costly than foreclosure).
Why the other options are wrong
- A. A loan modification alters the terms of the existing loan (e.g., interest rate, term) to make payments more affordable, but doesn't involve selling the property.
- C. Foreclosure by judicial sale is a court-supervised process where the property is sold to satisfy the debt, which is what the homeowner is trying to avoid.
- D. A deed in lieu of foreclosure is when the homeowner voluntarily transfers the deed to the lender to avoid foreclosure, without a sale to a third party.
Short Sale
The sale of real estate in which the net proceeds from selling the property fall short of the debts secured by the property's liens, and the lienholders agree to accept less than the amount owed.
- Requires lender approval.
- Avoids foreclosure for the borrower.
- Can negatively impact credit, but less severely than foreclosure.
Memory trick: Short Sale: Sell 'S'hort, 'S'top Foreclosure.