Short Sale vs. Foreclosure

Short sales and foreclosures are options available to homeowners who are either behind on their mortgage or owe the bank more than their house is worth. There are different reasons homeowners would choose one option over the other, so it is important to understand the differences between a short sale and a foreclosure.

A short sale is when the homeowner is still in possession of the home, but owes more to the bank than the property is worth. When a house sells for less than the balance owed on the mortgage, the home seller needs to either come up with the difference between the sales price and the amount owed on their loan or prove that a hardship situation exists and explain to the bank why they can’t afford to keep their home.

Foreclosure involves a lawsuit in which a bank, mortgage company, or other lien holder seeks to take an owner’s property to satisfy a debt. The bank or lender may actually take ownership of the property or have the property sold to pay off the debt. As a result of the foreclosure, the owner loses whatever rights they had in the property.

As a homeowner, there are several reasons why a short sale may be better than a foreclosure:

You may experience some of the same drawbacks as a foreclosure, but they might seem less intense:

For many sellers, though, the chance to buy another home in two years is the real motivation to do a short sale. Good credit behavior can supplant bad credit after two years, even though the derogatory remains.

Although going through foreclosure is often painful for sellers, there are some benefits:

Few people, apart from the sellers who choose to buy and bail, want to experience a foreclosure. Memories are made in a home, and losing it can be hard. Here are other drawbacks to foreclosures:

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. Finding a lender who will fund that kind of loan is very difficult. If you are current on your mortgage, you can qualify for an FHA loan immediately as well, but lender requirements can be difficult, such as you have to move more than 600 miles away.

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within 2 years, regardless of whether the home is your primary residence. The wait for FHA is 3 years.

With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.

If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.

All lenders report short sales differently, with many reporting “paid in full for less than agreed,” and some report the short sale as a charge off. Negative credit, however, stays on your report for 7 years.

If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record. A foreclosure shows up as a public record in your credit report, much like bankruptcy. 

Enlist the services of a Realtor who is experienced with short sales. The realtor knows exactly to whom and how to speak and what else needs to be done in order to make the sale go through successfully. Should you decide to go through with the process on your own, make sure you bring professional advisors with you when you visit either the foreclosure or the short sale.

Keep in mind that foreclosures are sold “as is” and are usually in run-down condition and in need of much repair. Most banks do not participate in fixing up foreclosures. Short sale properties usually are in much better condition as the owner is most likely still occupying the residence and has been trying to maintain some sort of standard in order to sell the house. The price of a short sale home is therefore likely higher than a foreclosure, which can be sold by the bank at a large discount. This is not always the case, however, so check out the prices of other homes sold in the neighborhood to get a good idea of the actual market value.

Do the proper research into each available property worth considering, and be cautious before making any deal. Always get a preapproval from the bank for either a foreclosure or a short sale, so you can grab the property you want without waiting for the bank to get back to you. This ensures you don’t lose the home you want. 

The process for a short sale is longer than for a foreclosure. With a foreclosure, the bank owns the title of the property and assumes any existing liens on the property. This shortens the timeline somewhat. However, even with researching liens, sometimes a short sale goes through easily and more expediently. There are advantages and disadvantages to purchasing foreclosures as well as short sales. Most importantly, find the property you wish to buy, follow the correct procedures and be financially fit to see the sale through.

With short sales, you pay less than the outstanding mortgage due. This typically means a good value for your money. For example, you could purchase a well-kept single family home for $50,000 if the outstanding mortgage amount is around $60,000. This is a lot of money, but that $50,000 can buy you a $100,000 or more home! On the other hand, foreclosures are often sold for dirt-cheap. The price you pay depends on the property and the competition at foreclosure auctions. Also, remember that those who allow their homes to go into foreclosure have reached the point where they don’t care anymore. This may result in an unkempt or damaged home.

In short sales, you are dealing with people who are selling the house themselves, not getting evicted, so it may be a more pleasant interaction and less of a hassle after the house is sold. It may not be as cheap as a foreclosure, but it may be easier after the fact. If you are looking for less hassle after the sale, it is best to go with a short sale or vacant foreclosures.

Foreclosure auctions have many rules and restrictions which vary by state. In most cases, payment is required within 24 or 48 hours. Most often, professional investors with needed funds on hand attend and win at foreclosure auctions. Most have unlimited financial resources. If you want to buy a new home or are just getting started with real estate investing, you may need to secure financing first. Unless you have spotless credit, most lenders will not finance the possibility of you winning at an auction. They will, however, provide financing for short sale properties. You may save more money by buying a foreclosure, but keep in mind that the bank does not need to clean or fix the house, you may get it just as it was left.

Another thing to consider is that some home occupants refuse to leave without force. Essentially, with foreclosures, you may be left with difficult home occupants who won’t leave unless the authorities intervene.

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