Explaining the Difference Between Foreclosure & Short Sale
- CreativeOffers
- Feb 2, 2023
- 3 min read
Foreclosure and short sales are both situations that can arise when facing difficulty paying a mortgage. But what's the difference between these two processes? Knowing the key differences can help you make the best decision for your situation.
Table of Contents
What is Foreclosure?
Foreclosure is the legal process in which a lender repossesses a property due to the borrower’s failure to keep up with their mortgage payments. During this process, the lender typically attempts to recoup some of the loan's losses by selling the property. To do so, the lender will issue a foreclosure notice, which an individual should respond to within a specified time period for their best chance at saving the home.
What is a Short Sale?
It is important to differentiate this with a short sale. Rather than having their home taken away through foreclosure, homeowners who take the short sale route are able to try and negotiate with their lender to be free of any or most mortgage obligations and the lender does not pursue future claims or deficiency judgments against them. A short sale typically occurs when the homeowner owes more on their loan than the current market value of their home and seeks to prevent a foreclosure filing by selling the home “as is” for less than what they owe.
A short sale is an alternative to letting a home get foreclosed on that allows the borrower and lender to reach an agreement where the lender will accept less than the full amount due on the mortgage. This option is typically used as a last resort when a borrower doesn’t qualify for other forms of mortgage relief. During this process, a real estate professional will list and broker the home in hopes of receiving offers that are higher than what is owed to the lender. The difference in price between what’s owed and what a new buyer would offer goes directly back to the lender.
What are the Pros and Cons of a Short Sale?
The pros of a short sale include avoiding foreclosure and the associated late payment fees as well as allowing you to stay in your home until the sale is finalized. Potential cons of a short sale include needing approval from your lender, potential legal and tax consequences, significantly reduced equity (beyond what’s owed to the lender), and difficulty in obtaining traditional mortgage financing after completing a short sale due to information on future credit reports. With both a foreclosure and short sale indicating a borrower failed to pay a debt based on the terms agreed upon, both have a significant impact on your credit score.
During the short sale process, the lender may agree to forgive part (or all) of the mortgage debt that is associated with the house in order to facilitate a sale. The homeowner is usually granted a certain period of time to make arrangements for a buyer, but it can take up to several months for lenders to agree on and approve any proposed plan. However, this option also comes with very similar risks as foreclosure, such as difficulty securing traditional financing, potential legal issues over missed payments if they are still due at closing time and trouble qualifying for rental housing.
Do I Need an Attorney to Help With This Process?
It's recommended to utilize an attorney when going through either a short sale or foreclosure. An attorney can guide you through the details and often recommend the best option for your situation. Additionally, an attorney can provide you with vital legal advice and help prevent any potential scams that may be involved in a foreclosure or short sale.
Do I have other options?
At CreativeOffers, we specialize in buying homes from sellers with unique selling situations. Being put in the situation of selling a home with an underwater mortgage or a house with no equity to cover the debt can leave a homeowner with few options (with most options negatively impacting your credit). CreativeOffers gives you options, caring about you, your credit and your financial recovery. Do you have a home with little to no equity that you need to sell? Find out more about how CreativeOffers can help you move on with your life.
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