It can be very frightening to find yourself in a situation where you need to choose between a foreclosure and a short sale. Most people only ever buy a few houses in their lifetime and few have ever had to go through the process of a foreclosure or short sale, so most are unfamiliar with these processes and what they entail.
So what’s the difference between a foreclosure and a short sale and which one is better for you as a property owner?
What is a Short Sale?
A short sale entails the sale of a property for an amount that’s less than what is currently owed on the mortgage.
So let’s say you owe $200,000 on your home. But with the current real estate market conditions, your home could only fetch $150,000. This is a case where the lender may approve a short sale for $150,000. The sale comes up “short” on what’s owed on the loan.
In rare cases, the borrower may be required to pay some or all of the difference. But in most cases, the lender and borrower simply part ways once the short sale is completed.
What is a Foreclosure?
A foreclosure is quite different from a short sale. Foreclosure proceedings will be initiated once you’ve become significantly delinquent on your loan.
In most cases, the lender will attempt to work with the borrower to arrive at a solution that will enable the homeowner to remain in their home. Options may include restructuring the loan or enrolling in a special program to pay off the delinquent balance over a period of time.
But if the lender and borrower cannot arrive at some sort of agreement, foreclosure proceedings will move forward. When this happens, the bank will move to take possession of your home in the same way that a lender would repossess a car if you skip out on the car loan payments. You lose any equity in the property and will receive an order to vacate the premises as the foreclosure proceedings draw to a close.
The timeframe for a foreclosure varies dramatically from a few months to nearly a year or longer. The timeframe from start to finish of foreclosure proceedings will vary according to the state and region where you live, as each area has unique regulations concerning this process.
As a borrower, the adverse impact on your credit is significant and recovering from the foreclosure can take many years.
Once the bank takes possession of the property, they will typically resell it or auction the home in an attempt to recoup their money.
Is a Short Sale Better than a Foreclosure?
Each situation is unique, but generally speaking, a short sale typically provides the greatest benefit to both the lender and the borrower. Since every situation is a bit different, it’s wise to consult an attorney who can make a recommendation as to what option would be in your best interest.
From the borrower’s perspective, a short sale is typically preferable because it does not necessarily result in the same type of credit history damage as would arise with a foreclosure. In fact, new legislation means that you don’t even need to be delinquent on your mortgage payments in order to pursue a short sale; you simply need to be in imminent danger of becoming delinquent in the immediate future.
From the bank’s perspective, short sales are usually preferable over foreclosures due to the amount of time, paperwork and effort that’s involved in proceeding with a foreclosure. And then, once all is said and done in the case of a foreclosure, the lender still hasn’t recouped its money. The lender will need to expend more time and money to sell or auction the house, whereas with a short sale, the lender recovers some of its money and moves the property.
There are a number of unique steps and processes involved when going through a short sale instead of a traditional real estate transaction. You’ll have lots of advantages in this regard when you work with a short sale expert like Kristine Zelazo, better known as The Short Sale Gal.
If you’re seeking to sell your home as-is to an investor or in a short sale transaction, turn to Kristine Zelazo, the Short Sale Gal! Complete the home pre-sale form to provide Kristine with additional information on the property in question. Questions? Call 800.664.0616, x802.