Short Sale Vs Foreclosure
What is a Short Sale
A short sale happens when a homeowner owes more on the mortgage balance than the market value or sale price of the property at the point the owner wants to sell. For a short sale, the homeowner is essentially asking the mortgage lender (typically a bank) to accept a lesser amount than the total mortgage owed. 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.
What is a Foreclosure
Foreclosure is a legal process that happens when a homeowner (although "borrower" might be a more appropriate term from the perspective of the lender) is unable to make mortgage loan payments for a significant period of time.
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 is at risk of foreclosure—and when they foreclose, 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.
If the debt is not recouped, lenders will step in and foreclose on the property. To foreclose, they'll schedule a foreclosure auction to sell the house to a third party. Foreclosure auctions will be advertised in local newspapers and are typically held at the local courthouse.
If no one buys the home at auction, the lender becomes the owner and it's considered a bank-owned or REO (real estate–owned) property.
Benefits of a Short Sale over Foreclosure
Win/Win - From a lender's perspective, it's better to recover a portion of a mortgage loan than to absorb a total loss. Therefore, in lieu of a foreclosure, banks will often settle for a short sale. This allows both the lender and the homeowner to end up in a better position.
Credit Protection - You may want to qualify to buy a home in the future. Underwriters typically look at homeowners that cooperate with a lender more favorably than those who do not. Most short sale properties are delivered in superior condition to foreclosures protecting the lender's interest in the asset.
Addition Time - You may get additional time in the property while your lender processes your short sale. Although there is no guarantee on this front, lenders can take anywhere from 3-6 months in order to fully approve your short sale. This often allows the homeowner valuable time in the property prior to relocating.
Neighborhood Protection Short sales can help resuscitate a neighborhood by making it easier for buyers to get into homes at affordable prices. By giving buyers and sellers an option that avoids the nuances of a foreclosure sale, short sales can reduce the number of excess homes for sale in a neighborhood, in turn reducing the number of unkempt, vacant houses
Homeowner Control - Once the ball starts to roll in a foreclosure, an arduous and stressful process begins for the homeowner. The mailbox starts to fill up with demand letters and confusing documents, and constant exchanges with the lender's legal team ensue. In a short sale, there are still negotiations, meetings and paperwork for the homeowner to weave through. But the process plays out more like a traditional sale, as opposed to a litigious and pressure-packed foreclosure proceeding.
Scam Protection - Facing a foreclosure on one's property is disheartening enough. But there are dishonest opportunists waiting for the chance to pounce on stressed, vulnerable homeowners, potentially making matters much worse. Per the FTC, a number of well-publicized scandals related to foreclosures have taken place over the last decade. Many involve scam artists who offer money-back guarantees, catchy slogans and promises to save homes from foreclosure in order to get access to struggling homeowners' funds. The homeowners often come out of these fraudulent deals owing even more money and with no relief from foreclosure.
Deficient Balance Protection - One concern for many homeowners, however, is whether the bank will sue for a deficiency judgment after foreclosure. In an attempt to recover the difference in the amount that was paid and the amount of the loan, the bank can file a lawsuit against the homeowner. However, such deficiencies are usually negotiated as part of the short sale approval process protecting the homeowner from further legal action.
Keep Your Keys
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