REO refers to properties that a lending institution/investor has acquired due to a repossession of the home, also known as a foreclosure. Foreclosure is the legal process by which an owner’s right to a property is terminated, usually due to failure or inability of the owner to make mortgage payments on a timely basis or to comply with other conditions of their mortgage obligation. The lending institution/investor (which may be the original lender or a subsequent holder of the mortgage) becomes the legal property owner and offers the home for sale to recover the amounts owed to it.
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens’ full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.
A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower; however both will often result in a negative credit report against the property owner.
