Let me De-stress the process for those of you Dis-stressed by the current housing market.
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Distressed Property: A property that the homeowner cannot make payments on and is listed as a Short-Sale or it has become Bank Owned.
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Foreclosure Process: This is the process that begins once a homeowner does not make a payment. After 90 days of non-payment the lender will make a public notice of the delinquency. Within 6-12 months of non-payment the home will either be sold at auction on the courthouse steps or it will be come Real Estate Owned/Bank Owned.
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Short-Sale: A home listed for sale where the homeowner's mortgage is higher than the home can be sold for today. The homeowner submits a "hardship package" to their lender stating that they must sell the home due to lack of funds to make the mortgage such as: a move, illness, job-loss, death. The lender then must AGREE to take less than what is owed on the mortgage. If there are two lenders due to a second mortgage then both of them must AGREE (the second gets only a nominal sum in the transaction such as $1000 which means they often do NOT play the game). If there is a second mortgage It is important that the homeowner has "full settlement" language so the second lien holder does not come back later asking for payment.
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Bank-Owned/REO/Foreclosed Home: A home that has been foreclosed upon and is now owned by the bank who held the first mortgage. If there was a second lender for a second mortgage and there was not "full settlement" language the second lender reserves the right to request payment for the loan at a later date. If there is a large balance on a second mortgage it is often difficult to get this lender to agree to a short-sale where they will receive pennies on the dollar, if they are lucky. The bank will then list the home with a REO Real Estate Broker and it will be put on the Multiple Listing Service.
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Short-Sale VS Foreclosure: Both of these will have the same effect on the former homeowner's credit, however, the Short-Sale homeowner will be able to purchase another home after 24 months while the Foreclosed upon homeowner will have to wait 60 months before purchasing another home.
These are general user-friendly definitions of terms whose nuances are continually evolving. Just when you think you understand the current distressed real estate market there WILL be changes. If you want, or need, to understand the foreclosure process seek out a Real Estate Professional. The Internet is awesome and informative, but nothing beats consulting a Realtor who is in the trenches day after day.
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