What is a Short Sale and How Does It Differ from Foreclosure?

A short sale is an option for homeowners who owe more on their property than what it’s currently worth, and they are unable to keep up with their mortgage payments. In a short sale, the lender agrees to accept less than what’s owed on the mortgage to release the homeowner from the financial burden of the property. The lender may forgive the remaining balance or ask the homeowner to pay back the difference.

The Process of a Short Sale

The process of a short sale involves the following steps:

1. The homeowner contacts the lender to request a short sale and provides financial documents to prove financial hardship.
2. The lender reviews the homeowner’s financial situation and determines if a short sale is a viable option.
3. The homeowner lists the property for sale and finds a buyer.
4. The lender reviews the offer and approves or rejects it.
5. If the offer is approved, the sale closes, and the homeowner is released from the mortgage debt.

Advantages of a Short Sale

• The homeowner is released from the financial burden of the property.
• The homeowner avoids foreclosure and the negative consequences it brings.
• The lender may forgive the remaining balance, and the homeowner can avoid paying a deficiency judgment.

Disadvantages of a Short Sale

• The homeowner may still owe taxes on the forgiven amount.
• The short sale may take longer to complete than a traditional sale.
• The homeowner may still have to pay some fees associated with the sale.

What is Foreclosure?

Foreclosure is a legal process that occurs when a homeowner is unable to keep up with mortgage payments, and the lender seizes the property to recover the unpaid debt. Foreclosure is often the last resort for lenders when other options, such as a short sale, have been exhausted.

The Process of Foreclosure

The process of foreclosure involves the following steps:

1. The homeowner misses several mortgage payments.
2. The lender sends a notice of default to the homeowner, indicating that foreclosure proceedings will begin if the payments are not caught up.
3. The homeowner has a certain amount of time to catch up on the payments, or the lender will initiate foreclosure proceedings.
4. The lender seizes the property, and the homeowner is evicted.

Advantages of Foreclosure

• The homeowner is released from the financial burden of the property.
• The homeowner can avoid the stress of trying to sell the property.
• The foreclosure process is often quicker than a short sale.

Disadvantages of Foreclosure

• The homeowner’s credit score will be severely damaged.
• The homeowner may still owe the lender money after the sale of the property.
• The homeowner may face difficulty in finding a new place to live.

Short Sale vs. Foreclosure: Which One to Choose?

Choosing between a short sale and foreclosure depends on the homeowner’s financial situation and priorities. Here are some factors to consider:

When to Consider a Short Sale

• The homeowner wants to avoid the negative impact on their credit score.
• The homeowner wants to avoid the legal and emotional stress of foreclosure.
• The homeowner wants to sell the property quickly.

When to Consider Foreclosure

• The homeowner cannot afford to make mortgage payments.
• The homeowner has exhausted all other options, including a short sale.
• The homeowner is willing to accept the negative consequences of foreclosure, including damage to their credit score.

How Short Sales and Foreclosures Affect Credit Score

Both short sales and foreclosures can have a negative impact on a homeowner’s credit score. However, the extent of the damage depends on several factors, including the homeowner’s credit history and the lender’s reporting policies.

In general, a short sale is considered less damaging to a credit score than foreclosure. A short sale may lower a homeowner’s credit score by 100-200 points, while a foreclosure can lower the score by 200-300 points or more.

How to Avoid Short Sale or Foreclosure

If you’re struggling with mortgage payments, there are several steps you can take to avoid a short sale or foreclosure:

• Contact your lender and explain your financial situation.
• Explore other options, such as loan modification or forbearance.
• Cut back on expenses to free up more money for mortgage payments.
• Consider selling the property through a traditional sale, if possible.

Conclusion

A short sale and foreclosure are two options for homeowners facing financial difficulties. While both can relieve the financial burden, they have different implications on the homeowner’s credit score and financial future. Choosing between a short sale and foreclosure depends on the homeowner’s financial situation and priorities.

FAQs

1. Can I buy a house after a short sale or foreclosure? Yes, you can buy a house after a short sale or foreclosure, but it may take some time to rebuild your credit and qualify for a new loan.
2. How long does a short sale stay on my credit report? A short sale can stay on your credit report for up to seven years.
3. Can I negotiate the terms of a short sale with my lender? Yes, you can negotiate the terms of a short sale with your lender, but the lender has the final say in whether to approve or reject the sale.
4. What is a deficiency judgment in a short sale or foreclosure? A deficiency judgment is the difference between the amount owed on the mortgage and the sale price of the property. In a short sale, the lender may forgive the deficiency, while in a foreclosure, the homeowner may still owe the deficiency.
5. Can I avoid foreclosure or short sale by filing for bankruptcy? Filing for bankruptcy may delay foreclosure proceedings, but it does not guarantee that you can keep your property or avoid a short sale or foreclosure.