What’s the Difference Between a Foreclosure vs. a Short Sale?
When the real estate market fell apart a decade ago “For Sale” signs popped up everywhere. A rider indicating either a Foreclosure or Short Sale was often attached. While most people understood what a foreclosure was, they scratched their heads at the words “short sale.” Both terms deal with the issues pertaining to the mortgage on a home, but there is a difference. So that begs the question:
What is the difference between a foreclosure vs. a short sale? To start, here’s a brief summary of each one.
What is a Short Sale?
When a homeowner wants to sell their home via a short sale, it means the property is not worth what is owed, and the owner has asked the lender to accept that lesser amount to pay off the loan. Essentially, a short sale means the homeowner is willing to pay off the debt based on the current value of the property and be “short” the balance. Let’s say the loan amount is $200,000 but the home sells for only $140,000. The homeowner (seller) is basically “short” $60,000.
Short sales were a regular occurrence when the real estate market collapsed, and home values plummeted. On top of that, the economy was in dire straits, and people had either lost their jobs or had to accept drastic pay cuts. Instead of simply walking away from their homes and letting them go into foreclosure because they couldn’t make their monthly payments, banks and lenders were more apt to accept a lesser amount on the loan rather than be left with the whole nut, so to speak.
There is a process to sell a home as a short sale which varies with each lender. Short sales must be approved by the lender and have advantages and disadvantages. It’s important to consult with the lender holding the mortgage on a property before attempting to sell it via short sale.
What is a Foreclosure?
A foreclosure occurs when a homeowner (borrower) simply stops making the monthly payment on the mortgage for several months. To recoup the loss, a lender will take back the property from the borrower through legal channels, or foreclose, evict the residents, and sell it.
Prior to the actual foreclosure, the lender presents the borrowers with a Notice of Default and the intention to foreclose within a given time period. At that point, the borrowers can make restitution and come current with the back payments owed, attempt to short sale the property (if the lender allows), or let it continue into foreclosure. Because each state has different rules related to foreclosure, again, the process varies. In the end however, if a property goes into foreclosure, it is auctioned off “at the courthouse steps” to the highest bidder. Should the property not sell at auction, it becomes the lender’s property and ends up in the hands of a licensed realtor to be sold as a real estate owned (REO) property.
How Do Short Sales Differ from Foreclosures?
While both are options to deal with the inability to pay back a mortgage, a short sale may be attempted (if the lender agrees) prior to placing a home in foreclosure. Essentially, with the short sale, the borrower can pay back a good chunk of the mortgage; whereas, a foreclosure is taking the property away from the borrower.
The foreclosure process moves faster than the short sale process in that once a home has been placed in foreclosure, it is either auctioned or sold as an REO property to new buyers. Short sale paths take longer and involve negotiations on costs and fees between the lender and the prospective buyer.
Another difference between the two is in terms of buyers being able to truly see what they get. When a buyer purchases a foreclosure at auction, he must buy the property lock, stock, and barrel – meaning the buyer cannot have an inspection to see if there are structural or functional issues, and they agree to pay any outstanding liens attached to the property. As we stated, however, if a property does not sell on “the courthouse steps,” or auction, it becomes an REO is sold through a realtor following the path of a regular home sale.
Apart from the lender being involved in negotiating the agreed to price, a short sale follows the same buying process as a traditional home sale. It is also a better option for a seller than losing the property through foreclosure.
Is There an Alternative?
Prior to listing a home as a short sale, it is worth talking to an investor who buys homes for cash. While it may still be a short sale, it may shorten the sales process because a borrower (seller) is not only asking the lender to approve a short sale, he is bringing a cash buyer to the table as well.
Selling a home for cash is also faster since no one is seeking a mortgage on the property. The two parties simply come to an agreed to the price and go through the steps of the transaction to complete the sale.
Before talking to a lender about a short sale, it is worth the time to talk to one of our representatives. We buy homes for cash and would like the opportunity to help you sell your house fast. Contact us to schedule an evaluation.
Before you consider a short sale, contact New Again Houses® to get a fair cash offer for your home.
We buy houses for cash and we can close in as little as 5 days. We make the process simple so you can find freedom from your old home. Contact us today for a free home evaluation. We’ll give you a fast and fair cash offer!