What’s the difference between a short sale and a foreclosure? Both present different advantages and disadvantages for the buyer and seller.
What Is A Foreclosure In Murfreesboro, TN?
In simple terms… “A foreclosed home is one in which the owner is unable to make his mortgage loan payments and the bank repossessed the home” (source). If you stop making your house payments… the lender has the right to foreclose on your house so they can attempt to recoup the money that was lent to you.
A home is typically foreclosed on when the borrower fails to make their mortgage payments. The bank assumes ownership and possession of the property. The borrower is typically evicted when this happens. The house is usually sold at a foreclosure auction or more sometimes the bank will use a realtor to list it on the MLS. A foreclosure damages the credit rating of the borrower, and makes it very difficult to obtain a mortgage for many years in the future.
A foreclosure can work differently depending on the state. Check out the foreclosure process information on the HUD Government website.
What Is A Short Sale?
The home is still owned by the borrower while going through the process.
Here is the definition of a short sale… “A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt” (source: Wikipedia)
A short sale must be approved by the lender before the borrower proceeds. The house is typically worth less than what is owed on the property and the owner must be behind in payments. When there is a large downward shift in the market, or if the house has fallen into major disrepair for whatever reason, the result can be that the value of the house is less than the amount owed. This is sometime referred to as being “upside down”. The bank must agree to accept less than the total balance of the amount due. The unpaid balance (known as the deficiency) may or may not still be owed by the borrower. At Provision Homes we have been successful negotiating the deficiency amount to zero so the bank will not come after the borrower.
This option usually takes some time. There are often a few different lending institutions that own the mortgage. All parties who have a stake in the property must agree to the terms of the sale, or the deal could fall through.
Short Sale vs Foreclosure – Your Options
While both options can have negative consequences on the borrower, a short sale usually has less of an impact on the borrower’s credit score. A foreclosure could impact a borrower’s credit score by 300 or more points, whereas a short sale may only reduce the credit score by 100 points.
Borrowers who are foreclosed on are often ineligible to purchase another house for 5-7 years with a traditional mortgage. A short sale borrower can usually purchase immediately.
Let’s be real.. many Americans are struggle financially. With all the recent price increases in the cost of living some folks are simply having a hard time making monthly mortgage payments. Choosing between having the bank foreclose on your house verses initiating a short sale should be easy. If you see you are truly upside down use a reputable company such as Provision Homes to handle the process for you.
If you see you are heading for trouble our suggestion is this:
- Talk with your lender to see if they will work with you. Reach out to us to discuss your potential options before calling the bank. We can help guide you in the right direction by giving you some knowledge beforehand. Just reach out to us on our Contact page or call 615-310-1909 and we’ll discuss your situation.
- If the bank isn’t willing to work with you… your best option might be to sell your house. If you’re interested in learning more visit our how it works page. We can look at your situation and make you a fair offer on your house usually the day we meet at the property.
- Foreclosure. Last resort is to let the house fall into foreclosure. This is a very bad choice. It’s the worst possible scenario. It’ll harm your credit and you could still be left owing money to the bank even after the foreclosure is finished.
By knowing your options, you may be able to dodge a significant impact on your credit score, allowing you to purchase a new home when your situation improves. A foreclosure on your credit report makes that possibility extremely difficult for 5-7 years, so if you have the opportunity, a short sale can be the better option.
Have a pending foreclosure? We’d like to make you a fair all-cash offer on your house.