Short Sale Vs Foreclosure

Do you know the difference between a short sale vs foreclosure? As a buyer, knowing the difference can save you time, trouble and cash. As a homeowner, learning the difference can save your credit rating and a great deal of money as you negotiate with your lender. Short sales are two versions of the same basic idea; a homeowner is no longer able or no longer willing to pay the mortgage on a home, and the home is either sold to a buyer or repossessed by the bank.

A short sale can occur when a home is for sale but is not expected to or able to bring in a high enough sales price to pay off the mortgage. Short sales can occur for many reasons, but one of the most common is a dramatic drop in neighborhood property values. You can also require a short sale if you owe far more than the house is worth for other reasons, like damage, decline in neighborhood amenities or lack of equity due to refinancing.

Most lenders require a home to be listed on the market for at least three months before they will consider a short sale. With a short sale, an offer that is lower than the amount of the mortgage is presented to the lender by the homeowner. The lender will decide whether or not the offer is acceptable. If it is, they can accept that offer as full payment for the home and proceed with the sale. It is very important for the buyer to note that most short sales are "as is" sales, and repairs will not be completed before the sale. Sellers should be sure that the short sale releases them from any further obligation to pay on the mortgage.  A short sale will damage the seller's credit, but not as much as a foreclosure does.

Foreclosures occur when the homeowner is no longer able to make mortgage payments, and a short sale is not possible. After a period of time, different for every lender, the bank will repossess the home, and take it from the homeowner. The foreclosure process will vary depending on the state the home is located in, but all result in the bank owning the property. A foreclosure is about the worst thing that can happen to your credit, and is very stressful, avoid this at all costs. If the home is repossessed, the bank may still sue the homeowner for the amount owed on the mortgage, or the difference between the mortgage amount and the selling price. As a buyer, you may be able to find a bargain my purchasing a foreclosed home, but as with a short sale, these homes are sold as is, and may be in poor repair.

Given the choice between a short sale vs foreclosure, a short sale generally works out better for the seller, especially if any excess mortgage debt is forgiven. For a buyer, in the choice between a short sale vs. foreclosure, a foreclosure home may be an easier deal to get, simply because the bank already owns the property and wants to get rid of it.