SHORT SALE AND FORECLOSURE: HOW ARE THEY DIFFERENT?
March 24, 2020 | Eric Beepat
As unfortunate as it can be when homeowners fall behind on mortgage payments and must face the possibility of losing their homes, short sales and foreclosures provide them options for moving on financially. The terms are often used interchangeably, but they’re actually quite different, with varying timelines and financial impact on the homeowner. Here’s a brief overview.
A short sale comes into play when a homeowner needs to sell their home but the home is worth less than homeowner owes. The lender can allow the homeowner to sell the home for less than the amount owed, freeing the homeowner from the financial predicament. For example, if the homeowner sells the house for $300,000, but the remaining mortgage loan balance is $350,000, the seller is essentially $50,000 “short” on paying the lender back. That’s a short sale.
On the buyer side, short sales typically take three to four months to complete. Many of the closing and repair costs are shifted from the seller to the lender.
On the other hand, a foreclosure occurs when a homeowner can no longer make payments on their home so the bank begins the process of repossessing it. A foreclosure usually moves much faster than a short sale and is more financially damaging to the homeowner.
After three to six months of missed mortgage payments, a lender will issue a Notice of Default with the County Recorder’s Office. This notice is to let the borrower know he or she is at risk of foreclosure—and when it happens, the current owner will be evicted.
After receiving the Notice of Default, borrowers can try to settle their loan debt with their lender either through a short sale or by paying the mortgage balance they owe. This period is called pre-foreclosure and can last anywhere from 30 to 120 days after receiving the Notice of Default.
After foreclosure, the bank can sell the home in a foreclosure auction. For buyers, foreclosures are riskier than short sales, because homes are often bought sight unseen, with no inspection or warranty.
Short sales and foreclosures are both financial options for homeowners that are in financial distress. Both also have a negative impact for the homeowner’s tax return, credit score and credit report, and future prospects getting a loan.