The Possible Effects of the Redemption Period when Buying a Short-Sale Property
In a short-sale process, the lender agrees to receive the proceeds of a selling price that is less than the obligation of the borrower, in order to relieve the latter of the ballooning obligation. Under this condition, the latter does not foresee any possibility of being able to settle his defaulted payments. This is possible as a selling condition, particularly if the borrower could sufficiently explain to the lender his incapacity to pay, based on acceptable conditions.
As a prospective buyer, you may go through the motions and processes of applying for a loan to enable you to pay the borrower’s obligation to the lender, and thus become the future owner of the property held as collateral by the lender.
The borrower-seller forfeits his rights to redemption because the property will no longer go through judicial processes, which is a requirement for the said provision.
However, if you do not pay the short-sale outright and resort to a home loan to pay-off the borrower-seller’s obligations, you allow time for the latter to change his mind.
The borrower as the seller of the property does not have any financial gain in the short-sale but benefits only in terms of avoiding foreclosure proceedings. The borrower retains a better credit report rating since it appears that he could settle his obligations, instead of allowing his mortgage loan to reach foreclosure.
The lender may approve this short-sale condition because the deficiency between the selling price and the amount of obligation due from the borrower is judged a better option than a foreclosure proceeding. However, unless the amount is fully paid by you as the prospective seller, the lenders can still change their minds.
There are two possible scenarios that can be expected from this selling condition, which can be influenced by the borrower-seller's right to reclaim the property within the legally allotted time.
- The borrower/seller divests his right of redemption to the property because it did not go into foreclosure proceedings and thus entitles you to the right of ownership to the property once you fully pay the obligations via home financing or cash settlement.
- In between the period that you are having your own loan processed to settle the short-sale, the bank's approving officers can still change their minds and go into foreclosure of the property. The borrower-seller on the other hand, could still opt to use his redemption rights in case his financial situation improves or to avoid eviction.
This is while you are still in the process of getting your loan approved and the borrower-seller’s change of heart will, likewise, affect your own loan application, because the property will no longer be available to you.