Short Sale vs. Foreclosure: Do You Know the Difference?

If you understand the process of getting a car repossessed, then you have a general idea of what a foreclosure is. It is basically a repossession of your house. So what is a short sale and what is the difference between the two? There are a couple of differences and different financially consequences for each. Here is a breakdown of the two.

Understanding Short Sales

In a short sale, you as the homeowner are trying to find a way to unload your home as fast as possible when you are no longer able to pay your mortgage. According to government data there were at least 2.2 million short sales across the U.S. from 2009 to 2013.

Why a Short Sale?

By finding a buyer on your own who is willing to pay close to what you owe on your mortgage, you are able to avoid a lot of the fees associated with a foreclosure. You get to do it on your own terms, in conjunction with your lender, to come to a mutually agreed upon solution. The bank usually partially forgives any outstanding balances you may owe, but you’ll have to discuss this with your bank and get approval in advance.

The seller negotiates the deal directly with the buyer but the deal ultimately has to be approved by the mortgage lender before a short sale can move forward. The bank will usually lose thousands of dollars on the deal but not nearly as much as they would should the home go into foreclosure.

Consequences of a Short Sale

Your credit report will take a hit after a short sale. In fact, even though the credit impact is supposed to be less through a short sale than a foreclosure, there is evidence that credit reporting agencies are making no distinction between the two. That could mean that you will suffer the same negative credit consequences of a foreclosure even with a short sale.

Understanding Foreclosures

Unlike with a short sale, you are completely at the mercy of the lending institution in a foreclosure. The foreclosure is the last resort when you stop making your mortgage payments over a period of time.

It is in essence the bank repossessing your home. However unlike with car repossession, you can’t make a payment and get the house back. Once the foreclosure is in process, you no longer own your home and have to get out.

That costs the bank a lot more money to get the property ready for resale, often selling for much less at auction than what the home was worth. The lender sets the listing price at what they are willing to accept for the house. In a foreclosure, the homeowner takes a huge credit hit; the bank takes a huge financial hit.

Consequences of a Foreclosure

With a foreclosure on your credit report, buying another house can be difficult for several years after the event. Also, credit reporting agencies can keep your foreclosure on your credit report for up to seven years.

Other Options

If your home is underwater or you have fallen behind on your mortgage and need help, there are a number of government programs to help. The HAFA (Home Affordable Foreclosure Alternatives) Program can help you with a short sale in lieu of a foreclosure.

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