Short Sale vs. Foreclosure – What’s the Difference?

Whether you’re a buyer or a borrower / seller, a short sale and foreclosure each present different advantages and difficulties. We break down what you need to know in each case.

What Is A Foreclosure?

According to Redfin, “A foreclosed home is one in which the owner is unable to make his mortgage loan payments and the bank repossessed the home.”  If you stop making your house payments… your lender has the right to foreclose on your property so they can attempt to recoup their money that was lent to you. 

A home is typically foreclosed on when a borrower fails to make mortgage payments. The lending institution assumes ownership and possession of the property, evicting the borrower. These properties are then sold at auction or more traditional means utilizing the service of real estate agents. A foreclosure can damage the credit rating of a borrower, and make it very difficult to obtain a mortgage for many years.

A foreclosure can work in different ways. Check out the foreclosure process information over here at the HUD Government website.

What Is A Short Sale?

In a short sale, the home is still owned by the borrower.

The definition of a short sale is… “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 and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt” (source: Wikipedia).

In a short sale, the home is sold for less than the outstanding balance of the mortgage. The unpaid balance (known as the deficiency) may or may not still be owed by the borrower.

This option typically takes some time, as a few different lending institutions may own the mortgage. Each lender has different procedures as well. All parties who have a stake in the property must agree to the terms of the sale, and a potential deal could fall through if even one lender doesn’t agree. Lenders do not typically approve a short sale unless the homeowner is experiencing some financial distress.

Short Sale vs. Foreclosure – Your Options

The main difference between the two is whether or not the home has equity. A foreclosure can happen no matter what the mortgage balance is (compared to the home’s value), a short sale happens when the lender cannot recuperate their funds from a normal sale.

While both options can have ramifications, a short sale often has less of an impact on the borrowers creditworthiness.

Borrowers who are foreclosed on are often ineligible to purchase another home for 5-7 years with a traditional mortgage, where under certain circumstances, a short sale borrower can purchase again sooner.

Choosing between foreclosure and a short sale (or a 3rd option…  selling your house fast ) is an easy choice for a borrower having trouble paying a mortgage on time.

Sometimes, lenders are willing to work with borrowers to complete a short sale, to avoid the fees and time consuming process of conducting a foreclosure.

Our suggestion is always this.

  1. Talk with your lender and discuss ways that they can work with you on your loan. We offer free consultation where we can help guide you in the right direction if you run into issues with your lender… just reach out to us on our contact page and we’ll discuss your situation.
  2. Attempt a short sale or other modification program your lender may have that forgives part of your loan, creates a new / more affordable monthly payment so you can get back on your feet, etc.
  3. If the bank isn’t willing to work with you very much… your best option may be to sell your house. Work with a local real estate house buyer service like Skye Homes to sell your house fast for an all-cash offer. If you’re interested, we can look at your situation and make you a fair offer on your house within 24 hours. Just fill out the form below.
  4. Foreclosure. Last resort is to let the house fall into foreclosure. This is the worst possible scenario. It’ll harm your credit and you could still be left with money owed to the bank even after the foreclosure is finished. We highly advise to NOT sit around and let the bank take your home.

By knowing your options, you may be able to dodge a significant impact to your credit score, allowing you to purchase a new home when your situation improves. A foreclosure on your credit report makes that possibility extremely difficult for 5-7 years, so if you have the opportunity, a short sale can be the better option.

Have a pending foreclosure?  We’d like to make you a fair all-cash offer on your house.

Give us a call anytime at 877-210-6460 or
fill out the form on this website today! >>

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