Before 2008 the words short sale or foreclosure were not very commonly used between people. That all changed when the real estate bubble burst and millions of Americans found themselves behind on their mortgage and on the path to having the bank foreclose on their home. Many homeowners quickly found out about the short sale process. But what is the difference between these two? Let’s take a look at the different advantages and disadvantages of each.
What Is A Foreclosure?
According to the real estate website Redfin… “A foreclosed home is one in which the owner is unable to make his mortgage loan payments and the bank repossessed the home” (source). The foreclosure process is the legal way for a lender to take possession of the property if the homeowner stops making their house payments… This is the only way a lender can try and recoup the money they have on the house.
A home is normally foreclosed on when the person who borrowed the money fails to pay their mortgage payments. The lender then assumes ownership and possession of the property, and evicts the borrower. However, banks aren’t in the business of owning and managing real estate so these properties they take back possession on are then sold at the courthouse auction or by utilizing real estate agents. A foreclosure can damage the credit rating of a borrower, making it extremely hard to obtain a mortgage for many years.
Depending on the state that you live in… the foreclosure process can be done in different ways. Check out the foreclosure process information over here at the HUD Government website.
What Is A Short Sale?
According to Wikipedia the definition of a short sale is… “A short sale is a 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)
After 2008 the phrase short sale became such a common term that many people were glad it excited. A short sale allows a homeowner to stay in their home and rework the loan they have in place. The new terms of the loan are agreed upon by both the lender and the borrower. The home is placed for sale at a price that is substantially lower than what the loan amount is. Depending on the agreement the balance that was not paid can be completely wiped out or the borrower could still be left on the hook for it.
This short sale process typically takes some time, during the mortgage crisis in 2008 a short sale on a home could take up to 2 or 3 years depending on how many loans in default the bank had. This became even more difficult when no one knew who currently owned the loan. This was due to the constant practice of reselling loans that become so popular by lending institutions before the crash. Sometimes a potential deal fell apart because one lender didn’t agree to the terms. In a short sale, all parties that have a stake in the property must agree to all the terms in the sale.
So What Are Your Options For A Short Sale vs. Foreclosure?
While both options do have their own ramifications, a short sale often has less of an impact on the borrowers credit history than a foreclosure does. A foreclosure could impact a borrower’s credit score by 300 or more points, where a short sale may only drop the credit score by 100 points.
The credit score isn’t the only negative side effect. Borrowers who are foreclosed on are often unable to purchase another house for 5-7 years using a conventional mortgage, where under certain circumstances, a short sale borrower can purchase immediately.
With the economy still not fully recovered from the 2008 crash, many Americans continue to have a hard time making monthly mortgage payments. Many homeowners have said the choice was easy when deciding between being foreclosed on or initiating a short sale.
Many times the lender is willing to work with the borrowers to complete a short sale, this helps them by avoiding the extensive fees and time involved with conducting a foreclosure.
If you’re in a situation where you’ve fallen behind on your house payments then our suggestion is always this:
- Speak with your current lender and find out the different ways that they can work with you on modifying your loan. At M&L Investment Group, LLC we offer this service. We can help guide you in the right direction of the short sale process.
- Attempt a short sale or a loan modification program that your lender may have that forgives part of your loan, creates a new / more affordable monthly payment that allows you to get back on your feet.
- If the bank doesn’t want to work with you very much… your best option may have be to sell your house. With no cost to you to sell your house you can work with a local real estate house buyer service like M&L Investment Group, LLC to sell your house fast for an all-cash offer. If you’re interested we can take a look at your current situation and we can make you a fair cash offer on your home usually within 24 hours.
- Foreclosure. The last option is to let the house go into foreclosure. This is the worst possible scenario. This can and will harm your credit and you could still be left on the hook for the money owed to the bank even after the foreclosure is completed.
Knowing your options, can help you dodge a significant hit to your credit score. This will allow you to purchase a new home whenever your situation improves. Remember that a foreclosure on your credit report can make it extremely difficult to purchase a home for 5-7 years, so if you have the opportunity, the better option is to do a short sale.