There is a substantial difference between short sale and foreclosure. With a short sale, the borrower still has possession of their property and has all the benefits of home ownership. The property qualifies under the definition of a short sale because the borrower owes their lender more than the property is worth in today’s real estate market. If the homeowner were to try and sell the home, they would be short the difference between the sale proceeds and the mortgage balance payoff. Therefore, a short sale always requires the borrower’s lender’s approval for the sale because the lender is going to have to write off the difference between the short sale proceeds and what the borrower owes the lender.
A foreclosure property is a property that has been foreclosed by the lender because the borrower has defaulted on their mortgage payments. A foreclosure property has already gone through either a formal judicial foreclosure process or a trustee sale, depending on the foreclosure laws of the state where the property is located. When the property has been foreclosed, the borrower no longer has possession of the property or any rights to the property.
Difference Between Short Sale and Foreclosure Credit Implications
A foreclosure is more serious and damaging to your credit report and score. It stays on your credit as a negative item for seven years. The immediate impact is immediately after the foreclosure occurs. It can lower your credit score by as much as 300-400 points. Since there is no reporting category for a short sale, it can be reported as satisfied or paid as agreed. The implications of a short sale are less damaging on your credit score. If the borrower is current on their mortgage payments, then there will be no delinquencies reported. If the borrower is late on their mortgage payments, the late payments will negatively affect the borrower’s credit just like any other late payment that is reported by a creditor. Also, participating in short sale allows the borrower to qualify for applying for a new mortgage sooner if they decide to purchase another property within the next two or three years. With a foreclosure, the borrower may have to wait four or more years before applying for a new mortgage.
Benefits of Short Sale
After a short sale, the borrower gets to walk away owing the lender nothing, as long as the borrower and the lender agree that the sale proceeds satisfy the borrower’s mortgage balance. It is recommended that the borrower always get a statement in writing from their lender agreeing that the sale proceeds satisfy their debt. The costs of selling the short sale home, including the broker’s commissions, are paid by the lender. With a foreclosure, the lender could go after the borrower for a deficiency judgment if the state where the property is located allows deficiency judgments.
Foreclosures and short sales are also often differentiated by costs to the borrower and the lender. A short sale is quicker and costs everyone less time and money. A foreclosure costs the borrower and the lender more money in litigation fees. The lender has to hire an attorney to handle the proceedings, and the borrower may want need an attorney to defend against the foreclosure to keep their home. With a foreclosure, the lender has to wait longer to sell the home and obtain the proceeds because the property has to be sold at a foreclosure auction. If the property does not sell, then the lender has to buy it back and offer it for resale by listing it with a local Realtor. With a short sale, all the lender has to do is approve the purchase and sale agreement negotiated and agreed to between the buyer and the seller and order an appraisal or a broker price opinion. The lender still loses money, but they get the property off their books sooner and they don’t need to find a buyer for it.
Even the government has been encouraging lenders to participate in short sales with their
HAFA program. The borrower and the lender must agree to participate in the government’s HAFA program in exchange for incentives to do so. The borrower may be able to receive a $3,000 relocation incentive from the government for participation in the program and successfully closing the short sale transaction. For more information about the HAFA program, you can visit the government’s website at http://www.makinghomeaffordable.gov/programs/exit-gracefully/Pages/hafa.aspx.
Knowing the difference between a short sale and foreclosure is important in order to make the right decision on what to do if you are facing a financial hardship and can no longer make your monthly mortgage payment. Short sales and foreclosures are a common theme in contemporary real estate markets – but here the most important thing is not to bury your head in the sand. Be informed and proactive. Contacting your lender right away is recommended to let them know your intentions so that you can move forward with your life and concentrate on other family matters.