Foreclosure Vs Short Sales

It is a fact that no homeowner would like to go through the process of foreclosure or short sale. But in the past few years, due to the economic downturn and real estate market condition, a lot of homeowners are left behind their mortgage payments. This eventually led them towards short sale or foreclosure.

Foreclosure

Short Sales

Foreclosure is a process, which occurs when a borrower is unable to make the mortgage payments. Eventually, the lender takes over the property and asks the borrower to leave the property. The foreclosed properties can’t go through normal sale process. They have to be sold at an auction or through conventional real estate agents. Foreclosure strongly damages the credit score of the buyer.

Short sale is generally used as an alternative to foreclosure because it helps in alleviating the additional fees and charges need to be paid by the borrower and lender. Short sale also have a relatively lesser negative impact on the borrower’s credit score as compared to foreclosure. On the flip side, short sale requires more paperwork for all the parties. 

 Foreclosure basically happens when the borrowers defaults on payments.

 Short Sale is a situation where the borrower is unable to make the payments, owe more than the property’s worth and the lender agrees to go through short sale.

Foreclosure is initiated by the lender.

Short sale is initiated by the borrower.

 With foreclosure, the borrower doesn’t get anything as a relocation incentive.

 With short sale, the borrower has the possibility of getting a relocation incentive of $3,000.

Foreclosure has a huge impact on the credit score of the borrower. It can drop between 200-400 points and would remain on your credit report for 7 years.

Short sale’s impact is relatively lesser. The drop is between 50-150 points. It would be listed on the credit report if the lender reports the debt reduction to the credit report agency. 

If a borrower has gone through foreclosure, he/she will have to cite that on the future loan applications.

If the borrower has gone through short sale, he/she may or may not have to cite that on future loan applications.  

Foreclosure is not liked by anyone because it doesn’t benefit anyone whether it’s a bank or borrower or the overall real estate market.

As far as lenders (usually banks) are concerned, they are more in favor of short sale, where they can recover a small portion of the mortgage loan. This gives a little bit of cushion to both the lender and the borrower. 

In foreclosure, there’s a chance that the bank being a lender may sue the borrower for deficiency judgment, which will appear on the credit history of the homeowner and make it worse. Deficiency judgment is usually non-negotiable.

In a short sale, deficiency judgment is usually negotiated between the seller and the bank. But it also varies from state to state.

After foreclosure, the homeowner can’t sell their home or buy a new one. They are not eligible for any mortgage loan.

Avoiding foreclosure through short sale is a better idea because it has lesser side effects. The borrower can buy a new home. He/she are allowed to sell their homes, which somehow make it similar to a general home selling process.

A foreclosed home is more likely to remain in the market because usually people avoid buying them.

Short sale homes are relatively easier to sell but it’s a lengthy procedure too and one needs to be patient.

A foreclosure basically means that the borrower has exhausted all the options and the banks will have to remove them with court orders. During that time, the homeowner is given a certain amount of time to come up with the money but if they don’t, they’ll be evicted.

A short sale basically means that the seller gives permission to the bank to sell his/her home because they are unable to make the payments. If the bank agrees to the sales price, the homeowner can sell the house or they will have to negotiate with the bank. They have the final say.

Foreclosed homes are empty because the residents have been forced to leave the house.

In a short sale process, homeowner might live in the property because they are still the real owners.

Foreclosure gives almost no control to the homeowner. It is a demanding process where the homeowner keeps receiving different demand letters and legal notices. Eventually, the borrower is stigmatized by foreclosure for many years.

Short sale is less stressful because it is pretty similar to the normal home selling procedure. It allows the homeowner to have a more active role but it also involves a lot of paperwork.

After the borrower has gone through foreclosure, they won’t be eligible to buy a home in 5 years with some restrictions or in 7 years with no restrictions.

The borrower can buy a home immediately right after short sale under certain circumstances. For example, according to Fannie Mae guidelines, if your payments have never fallen beyond 30 days and the lender doesn’t ask you to pay the loan back, you can buy a new home immediately. But you will have to keep in mind that the conventional lenders won’t be willing to lend you the money. You might have to go look for non-conventional loans such as hard money loans.

 

Foreclosure or short sales both have their shortcomings and repercussions. It is always better to avoid them but if it’s unavoidable, you need to figure out what suits you. It is advisable to take the assistance of a foreclosure and short sale expert who could guide you throughout the entire process. For more information, please fill in the form below:

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Listing information last updated on November 19th, 2017 at 4:15am CST.