Short Sales vs. Foreclosures

Short sales and foreclosures are both common financial options to homeowners who are distressed borrowers. There are several different situations in which a homeowner would opt for a short sale or a foreclosure. Below we have outlined the difference between the two options facing homeowners who are in a pinch.

Short Sales

A real estate sale is considered a “short sale” when it generates proceeds that are less than the amount owed on the property. Short sales are usually favored by the homeowner if the overall value of a home drops by more than 20 percent. The lender responsible for the mortgage must sign off on the decision in order to proceed with a short sale. The lender must also be able to justify the necessity for the short sale being that a lender has the potential to lose money in the process.

Essentially after a home is approved for a short sale, a potential buyer will first negotiate with a homeowner and then gain approval from the lender next.

Short sales, although usually favored over foreclosures, can be tedious. Buyers and sellers can expect massive amounts of paper work and an extended closing process. Sometimes short sales, ironically, can take a full year to process.

Even with the inconvenience of the paperwork-intensive process, a short sale is favored because they are not as detrimental to the credit rating of the homeowner as with a foreclosure. In some cases, a homeowner may even be able to purchase another home immediately.

 Foreclosures

A foreclosure is usually the last option for both lenders and homeowners as the process has negative consequences for both. A foreclosure is the act of the lender taking possession of a home after a homeowner fails to make payments. Unlike a short sale, a foreclosure is initiated by the lender, not the homeowner. The point of a foreclosure is for the lender to force the sale of the home to try to make good on its initial investment of the mortgage.

 After the lender takes possession of a home, the home will be sold at a foreclosure auction. At auction the home is sold for cash to the highest bidder. The home will sell for significantly less than it would during a normal selling process, but the pool of buyers who can afford to pay cash up-front is small and the lender is left with the possibility of having to buy back the home at auction.

Although both short sales and foreclosures are not ideal for the homeowners or the lenders, home buyers can often save a significant amount of money on the purchase of the home if they are willing to cooperate and be patient with the process.