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What Is the Difference Between Short Sale And Foreclosure?
Homeowners and real estate agents may wonder about the difference between a short sale and foreclosure. Here are the answers to the most common questions that we, at Short Sale Expeditor, get asked each and every day of the week.
What is the difference between “in foreclosure”, “foreclosure”, and “foreclosed”?This is by far the most important question that we get asked all the time, and I believe that there is a lot of confusion in this area. The primary difference between pre-foreclosure and foreclosure properties is their owner. The former will still be within the legal possession of the borrower, while the mortgage lender legally owns the latter. Specifically, a home that is “in ” foreclosure is a home where the bank has begun the legal process of taking the home back from an owner who usually has not made several mortgage payments (usually more than 6, but state laws and foreclosure time frames vary). Once the foreclosure has occurred (after the home has been foreclosed), the property is usually auctioned off at the courthouse steps and may be purchased by an investor. Or, if it is not purchased or is not part of an auction, it reverts back to the lender, who is now the owner of the property.
What is a short sale?A short sale is the sale of a property—usually in foreclosure but not always—whereby the value of the home is less than the amount owed to the lender(s). In a short sale, the lender needs to approve of the sale and agree to accept less than the amount owed on the loan. In a short sale, lenders often agree to pay for real estate commissions and seller closing costs. This is where our team comes in—to negotiate with the lenders to get approval for our clients to sell the homes for the current value, not the amount owed.
What are the benefits of a short sale?Here are some of the benefits to the borrower (the owner) of a short sale:
- The short sale usually has a better impact on the borrower’s credit than a foreclosure. The foreclosure damages credit for 7 years.
- It can take between 4 weeks and 4 months to obtain the lien holder’s approval (that depends on the borrower, the hardship, and the lienholder). Although it will have a negative impact on credit reporting, borrowers may choose to stop making mortgage payments and save money for their move.
- No deficiency judgments; if negotiated, the bank will not hold borrowers liable for their loss.
- The bank pays all the expenses and the real estate commissions.
- There is no out of pocket expense for the homeowner.
- Homeowners having trouble making ends meet are able to control their move. In a foreclosure, the time frame is controlled by the lender and, if an owner is not careful, the sheriff could be at their door arranging to change the locks
What is the benefit of a short sale to the lender?Even though the bank is taking a loss, the loss is less because the bank does not have to pay the additional costs associated with the foreclosure. In a foreclosure, banks have to pay legal fees, and then they have to prepare the home for resale, including paying property taxes, insurance, utilities, and even property maintenance. The longer a lender holds a property, the higher the cost.
What if a person is in pre-foreclosure but does not need a short sale?That’s great. If a seller is close to the anticipated foreclosure date, our team can help to postpone the foreclosure date by negotiating directly with the lender. Then, when a buyer is obtained, the sale can go through in the traditional manner. If you or anyone you know (including any of your clients if you are a real estate agent) is having trouble making ends meet and paying their mortgage, please contact our office for a free consultation on the best way to approach your unique situation.
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