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At first glance, a foreclosure and a short sale can seem similar. After all, they both occur when you’re having trouble covering the costs of owning your home. However, if you’re facing one of these two scenarios, you need to know that some important differences exist between them. I’ve laid them out below. Keep reading to learn how they both work and what those differences could mean for you.
What is a short sale?
A short sale occurs when you sell a home for less money than you currently owe on the mortgage. It happens when the property has, for whatever reason, substantially depreciated in value since it was purchased. For example, if you sell a home for $200,000 when you still owe $250,000 on the mortgage, that would be a short sale. In that example, you’re technically coming up “short” by $50,000.
For the most part, a short sale functions in much the same way as a traditional home sale. You work with a real estate agent to put the home on the market and to find a suitable buyer. However, as the seller, you don’t have the final say in who gets to buy the home. Instead, since the bank is accepting a loss on the mortgage, they have to approve the short sale and the winning offer, which can take a while.
Once a short sale goes through, ideally, you’ll be free of any financial responsibility for the home. However, that isn’t always the case. Sometimes the lender can file what’s known as a “deficiency judgement”. against you to make up the loss. Fortunately, many states have laws against this. However, you’ll still want to read over your short sale approval paperwork carefully to ensure that you won’t have any personal liability.
What is a foreclosure?
A foreclosure, on the other hand, takes place when you stop making payments on your mortgage. After three to six months of missing payments, your lender will file a “notice of default” with the county recorder’s office. The notice is to let you know that foreclosure proceedings have begun and that you could be at risk of getting evicted if the proceedings go through.
After you receive the notice of default, you’ll enter what’s known as the”pre-foreclosure period”, which can last anywhere from 30 to 120 days. During pre-foreclosure, you’ll have the opportunity to work with your lender to resolve your debts. Usually, this occurs either by agreeing upon a repayment schedule or through a short sale.
Unfortunately, if the debt isn’t resolved by the end of the pre-foreclosure period, the lender will move forward with foreclosing on the home. If your home is foreclosed on, you’ll be evicted and the bank will put your home up for sale, either through traditional methods or at an auction.
What are the differences between them?
Though short sales and foreclosures are both methods of resolving financial difficulties with your home, there are significant differences between them. They are as follows:
The timing
In general, short sales take much longer to complete than foreclosures. In a foreclosure, the bank is intent on finding a way to recoup as much of their investment as possible, so proceedings have a tendency to move quickly. With a short sale, on the other hand, banks often need to get several levels of approval before they can move forward with the sale. That’s why short sales can often take several months to a year to close.
The financial impact
As the seller, your financial situation will be impacted negatively by having to utilize either a short sale or a foreclosure. However, the impact varies. With a short sale, though your credit score could drop up to 150 points, you should be able to buy a new home right away if that’s something you’re interested in doing. After a foreclosure, you have to wait up to five years before you can buy again and the foreclosure will stay on your record for seven years.
The seller’s involvement
In a short sale, the seller is very involved in the sale process. Aside from making the final determination of who buys the home, it proceeds similarly to a traditional sale. In a foreclosure, the bank drives most of the process. Aside from being able to negotiate repayment with the bank during the pre-foreclosure period, the seller doesn’t have much of a say in what occurs.