People who can’t make their house payments have higher risks of experiencing foreclosure by their mortgage lenders. It means the lender can take your home and force the house sale to generate funds to pay back the debt.
Research shows that one in 12,448 residential properties in the United States has a foreclosed status. Foreclosure is damaging to your credit and has severe legal and financial consequences.
Experts recommend avoiding foreclosures and focusing on alternative solutions like a short sale. In today’s article, we will discuss short sales and foreclosures so that you understand the difference between the two. Read on!
What is a Short Sale?
A short sale occurs when you sell your property for a specific amount that is less than the remaining balance due on the mortgage. You must pay in full the mortgage balance on your house when you sell your home.
The purpose is to ensure the lender or bank release the lien or claim on the house. That way, new owners take possession or ownership of the property. However, if your property is worth less than you owe on it, the house sale won’t generate enough money to repay the mortgage debt.
For instance, if your property is worth $300,000 in the current real estate market conditions, but you owe $400,000 on your home, then selling your house is challenging or impossible unless you have $100,000 in cash to pay the difference to the bank or lender.
On the other hand, in a short sale, the lender or bank agrees to accept a specific amount that is less than the full amount due on the mortgage. For example, the lender may decide to take $300,000 to ensure the sale goes through.
Your bank or lender may agree to a short sale because the company does not want the foreclosure expense. It is because the lending company knows that seizing your property or selling it won’t generate additional profits.
How does a Short Sale Works?
Opting for a short sale instead of foreclosure requires you to discuss the problem with your lender. The purpose is to come up and work out the arrangement. Your lender may agree to an acceptable price for your residential property.
Next, you will have to find a buyer for your property who can pay the agreed-upon price. Bear in mind that the lender must approve the home buyer to streamline the process and ensure a successful sale. The lender will receive the amount when the buyer purchases your house.
There are numerous benefits of opting for a short sale in lieu of foreclosure. First, a short sale is less damaging to your credit than a foreclosure. It does not result in the same process of the lender taking possession and selling your home. It means you can avoid the embarrassment that could result from a foreclosure.
What is Foreclosure?
Foreclosure is a legal process for a lender or bank to take ownership or sell your property when you default on the mortgage. Each American state has its own laws that apply to the foreclosure process.
Let us give you a simple example so that you understand the concept of foreclosure. For instance, you get a mortgage from a lending company or bank to purchase a residential property. Unfortunately, you lose your job and are unable to pay your mortgage.
It means you have violated the rules and broken the agreement with the lending company. Now, the lending company is worried it will lose money. So, it starts the process of foreclosure that involves seizing and selling your home to collect the money it owed under the mortgage agreement.
How does a Foreclosure Works?
When you sign the mortgage, you make a promise to the lending company. Breaking your promise can lead to legal and financial consequences because you have committed an act of default. Although each mortgage has a different agreement, common actions of default are:
- Can’t pay mortgage payments
- Failure to pay taxes and condominium fees
- Not insuring your home
- Structural damages to your property
- Bankruptcy and insolvency
When you commit an act of default, the lending company will start the foreclosure process. Remember, the bank or lender can also begin the process after one default, such as a missed payment.
Most lenders do not foreclose properties right away because it is a costly process. However, it makes efforts to come to an agreement with the homeowner. For instance, this could be a payment plan.
| Short Sales | Foreclosures |
| You can repurchase a property in four years via a conventional mortgage | You can rebuy a property in seven years via a mortgage |
| You can negotiate deficiencies with the lender | You can’t negotiate deficiency judgments with the lender or bank |
| You are not required to mention the previous short sale on your future property loan applications | You are required to mention the foreclosure in the paperwork when applying for home loans in the future |
| The process takes a few months | The process can occur immediately |
| A voluntary process | An involuntary process |
Final Words
Short sales and foreclosures are some of the biggest challenges faced by a homeowner in the U.S. However, foreclosures are more damaging than short sales that can cause legal and financial complications. Therefore, it is wise to opt for a short sale to prevent the severe damages associated with foreclosures.