Defining Foreclosures and Short Sales
It happens to the best of people. Whatever the reason—a bad financial decision, the sluggish economy—people sometimes find themselves in dire straits. As a result, they are forced to make hard decisions.
Perhaps one of the most difficult is figuring out what to do after defaulting on mortgage payments.
Often, the owner faces two options:
- Sell the property for foreclosure
- Sell it through short sale
What’s the difference?
The difference between a foreclosure and a short sale is simple.
A property is said to be in foreclosure when the owner stops mortgage payments and the lender exercises the legal right to take control of the property. Unless the owner can make up for the relapsed payments, the lender can sell off the property in a public auction. The moment the property is in the possession of the lender, usually a bank, the property is now a real estate owned (REO) foreclosure.
A short sale happens when the owner agrees to sell off the property at less than the amount he owes Usually, an owner agrees to a short sale to avoid foreclosure. Whereas foreclosures happen when the owner fails to make mortgage payments, a short sale becomes an option only when the owner declares the following:
- Inability to pay mortgage
- The debt is bigger than the current value of the property
Bear in mind that short sales happen only with the lender’s permission. Lenders are in no way obligated to agree to a short sale.
What happens in each case
Foreclosure and short sale work differently even if the end result is the same—the property is sold off.
However, the implications of each are different and far-reaching, with the ability to make or break the decision you make about your home.
The effect of foreclosure. The repercussions of havingthe stain of a foreclosure on your financial record can be felt for years. You will be required to declare this fact in future transactions like loans. You will also be restricted from buying a home anywhere from 5 to 7 years.
However, if the strain of making mortgage payments each month has become too much to bear, a foreclosure becomes the equally high price to pay for saying goodbye to your remaining mortgage. You can also continue living in the premises while foreclosure proceedings are still taking place. This usually takes a few months to complete.
The effect of short sales. Short sales, on the other hand, won’t leave a mark on your financial record. It will, however, affect your credit score, dropping from 50 – 150 points.Also, instead of being shut out from buying a home for 7 years, you’ll be able to purchase another home or to apply for a loan within 2 years. There is also no obligation to disclose the short sale in future loan transactions.
However, you must have the buy-in of the lender; otherwise the property may take some time to sell. The longer it sits in the market, the faster the depreciation of the property. And with short sales, the faster you sell off the property the better, as to avoid a complete foreclosure.