The Difference Between a Foreclosure and a Short Sale

Lets face it, the economy is cold, bad, not fun right now. When the economy goes sour, so does the financial welfare of most of us. For the housing market, this means that many folks need to sell their homes, foreclose, or do a short sale. What is the difference between a foreclosure and a short sale, and what does it mean for buyers and sellers?

Foreclosure

  • Definition: Foreclosure is the legal and professional proceeding in which a lender obtains a court ordered termination of a mortgagor’s equitable right of redemption. Some call it the “F” word for sellers. In most cases, the lender obtains a security interest — like the property — from the borrower. If the borrower defaults on the loan, the lender then tries to repossess the property and gives the borrower the chance to repay the debt. Because the lender is then in a tight spot, not knowing for sure that they will receive the debt repayment from the borrower, the lender will usually then get what they can from the property, like selling it at auction. There is a lot of legal stuff that goes into a foreclosure — meaning, lots of paperwork, deadlines, and such — and it is not a favorable outcome for the borrower.
  • Buyers: Buyers can get great deals on foreclosed properties because they usually sell at auction. Folks can get homes for way less than they would pay with a regular sales transaction. Foreclosures are quite common these days (although, thankfully, not too common in Harrisonburg!), so there are a good deal of properties to choose from. Foreclosure auctions are required to be advertised a certain number of times in the newspaper, too, so you’ll always be in the know.
  • Sellers: Foreclosures are not favorable. They take a 200 – 400 point hit on your credit score, put you in a bad financial situation, you may be required to leave your home immediately, and will always have a foreclosure on your record, which means lenders down the road may not approve you for another home loan.

Short Sale

  • Definition: A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. In a short sale, the lender agrees to take a loss on the amount owed by the borrower because of the financial hardship the borrower (also called a mortgagor, or in our terms, the homeowner — well, sort of) is going through. When the property sells, the mortgagor turns over all the proceeds of the sale to the lender. There is a lot of paperwork for short sales, and a lot of “eyes” have to see this paperwork and approve it in order for a sale to actually go through. It is not defined as a short sale because of the time it takes to close. It is defined as short because the lender is “shorted” the full amount of the loan.
  • Buyers: If you are interested in a property that is a short sale, beware! Although you may be getting a great deal for your money, you may have to wait long periods of time to be approved for the purchase. You are dealing with banks, after all. It would be very smart to consult with a real estate lawyer (to discuss the contract) and an accountant (to discuss tax ramifications).
  • Sellers: This is a better alternative — or less frustrating alternative — to a foreclosure. Beware that not all properties qualify for short sales, and that you’ll have to talk to your lender about the situation. There are some benefits to doing a short sale rather than a foreclosure, including being in control of the sale (it is more like a regular transaction on your part), you will know who is buying your property, and you can still be current on your payments (contrary to popular belief).
Image credit: respres

About Lisa Oates

Lisa is the creative mind behind The Harrisonburg Homes Team, providing streamlined content management, quality authorship, and graphic design for Harrisonblog. She's passionate about blogging, enjoying life, and a good cup of coffee.

3 thoughts on “The Difference Between a Foreclosure and a Short Sale

  1. Pingback: Twitter Trackbacks for The Difference Between a Foreclosure and a Short Sale [harrisonblog.com] on Topsy.com

  2. Foreclosure Listings

    There are good companies out there actually trying to help people. But unfortunately there are also bad ones that are trying to take advantage of the situations. I purchased 2 foreclosures and have been happy with my purchases.

    Reply

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