The Difference Between Short Sale and Foreclosure
Whether you should pursue a short sale or a foreclosure is going to depend on your situation. It’s a difficult question to answer with a lot of variables, but here’s a short list of the pros and cons of either.
What is Foreclosure?
Foreclosure, as we covered in our article on Foreclosure Avoidance essentially means that the owner of the home has stopped making payments, and is relinquishing all rights to the home. The lien holder then steps in and attempts to redeem the home by court order. The foreclosure process starts once the homeowner becomes delinquent on payments, and the time it takes varies by state. Foreclosure does not necessarily mean that the homeowner did not exhaust all options to save the home, but in the end for whatever reason, a mutual agreement could not be reached and the home was lost.
Foreclosure is often a devastating process for families, and though people may enter into foreclosure for all kinds of reasons, there’s a consensus of trends that circle around:
- Job Loss (Laid Off, Fired, Injured)
- Personal Debt
- Injury (Which can lead to mounting medical bills, inability to work)
- Discrepancies with the co-owner of the mortgage (e.g. Divorce, Separation)
- Transfer (Job transfer, military relocation)
If a family has missed a payment, or intends to miss payments in the future, foreclosure is not necessarily your first or best choice. The proceedings of foreclosures vary from state to state, but keep in mind there are other options available such as a mortgage modification or a repayment plan if you qualify.
What is a Short Sale?
A Short Sale is when a lender agrees to accept less than the total amount due on the loan. It’s very important to understand that not all lenders will accept short sales, especially if it would make more financial sense to foreclose. The only way to figure that out would be to contact your lender and discuss the terms of your loan with them.
There are consequences for short sales, including potential tax ramifications which you should discuss with a CPA or real estate attorney. For whatever reasons, short sales have been touted as the solution to foreclosure, when in reality the consequences (especially regarding your credit score) are very similar.
Other options include contacting a cash buyer or putting tenants in the property and trying to recoup the cost of the mortgage through monthly rent.
The best move for your situation will depend entirely on you, though seeking out help from a professional may not be a bad idea, to help you better understand your options.
