Difference Between Short Sale and Foreclosure

Short sale and foreclosure are terms widely used across the housing industry and bear great implications for both, the borrower and the lender. While both come into play in situations where the homeowner is failing to make mortgage payments, their concepts differ in various aspects.

Short sale is the option which is mutually agreed upon by both parties, where the borrower and lender decide to sell the property for less than the amount owed on it. The lending institution, such as a bank, will allow the owner to sell the house and use the proceeds to catch up on payments.

Foreclosure arises when the borrower has defaulted on his or her mortgage payments. It becomes clear to the lending institution that the only way to recover the investment is to assume full ownership of the property. An auction thus takes place, where the highest bidder gets the property.

The two processes have varying time periods, given the complications involved. Foreclosed properties can take greater time to sell as compared to a short sale one, where the total amount will be less than the market price.

Moreover, the buyer or homeowner will have some sort of leverage when selling the house through a short sale. However, short sale agreements do not release borrowers from the outstanding balance remaining on the loan. The foreclosure is initiated by the lender, giving the borrower little chance to negotiate the terms of the selling agreement.

Foreclosure will have a devastating impact on the borrower’s credit history, which can take a hit of as high as 300 points. This will further limit the borrower from taking out future loans, with the state imposing 5 to 7 year bans. The impact of a short sale on the credit report will depend on the state you belong to, but will still adversely affect you in some capacity.

Instructions

  • 1

    Short sale

    It is the selling of a real estate where proceeds fall short of the balance of loan taken against the property. It usually occurs when a homeowner fails to make timely mortgage payments for a certain period of time, forcing the lender to get back the loan amount by selling the property for a lesser amount.

    Image Courtesy: homesbyminna.com

  • 2

    Foreclosure

    It is a situation or process where the lending institution decides to take possession of a mortgaged property after the homeowner defaults on the mortgage payments.

    Image Courtesy: dtrrealty.com

Leave a Reply

Your email address will not be published. Required fields are marked *


− 5 = two