Real estate agents can be guilty of throwing around terms like REO, foreclosure, bank owned and short sale without taking the time to explain what they are, assuming that consumers already know. If you are a first time home buyer it can be confusing to understand, especially when some of the terms really mean the same thing.
To help you understand and to cut through the jargon here is a short glossary of foreclosure related terms.
Foreclosure Terms Explained
Bank owned home. Already foreclosed, the title to this house is in the name of the bank.
Foreclosure: Somewhat vague, this term is sometimes used to mean a house that is bank owned. Other times it is used to describe a house that is going through the foreclosure process, which is lengthy and involves many steps.
Lienholder: The mortgage company, or companies who lent money using the property to secure the debt.
Lis Pendens: This is latin for “pending lawsuit.” A public notice of litigation has been recorded.
PreForeclosure: Technically, every home with a mortgage could be called a pre foreclosure. In fact, on some websites that advertise pre foreclosures, the properties may have very little chance of going through the foreclosure process and becoming a bank owned home. It could be that the owner has missed or been late on only one payment.
REO: This is an acronym which stands for Real Estate Owned. It is now a bank owned property. It has already gone through the foreclosure process and the bank has taken it back.
Short sale: This is when the owner of a home cannot sell the home for what they owe on it. After an offer is received, they seller asks the lienholder(s) to forgive the difference between what they owe and what they can sell for. What is a short sale?
A short sale occurs when a homeowner owes more on their home than they can sell it for. It may or may not be a pre foreclosure home, meaning they may or may not have missed any payments and the bank may or may not have filed a lis pendins starting the foreclosure process.
To summarize, an REO is what most people call a foreclosure home and is sometimes referred to as a bank owned home as well. REO is actually the more correct term.
Three Common Myths about Foreclosures
Myth Number ONE: Foreclosure homes are in bad condition
This is absolutely false. In fact, many foreclosures feature new carpet and fresh paint, and many of them already have had repairs performed. Forget the horror stories you have heard or read about, these days, at least here in Albuquerque, most of the foreclosures are in average or better condition. Some are way above average.
Myth Number TWO: Foreclosures require special financing
Just because they are sometimes called bank owned homes, that doesn’t mean you have to use that bank to do your financing. Although a few banks require you to pre qualify through their system, you can almost always use whatever lender you want.
Myth Number THREE: Banks won’t do repairs
Sometimes REO’s are advertised “in as-is condition with no warranties expressed or implied.” If there is major repair, you may be able to get the bank to pay for it. Minor cosmetic items are not usually covered by the bank. Most importantly, you can still have a home inspection performed so you won’t get into a lemon.
Watch this one minute video titled “Should I Buy a Foreclosure Home?”