Foreclosure Vs. Short Sale in California
Whether you're in the throes of a real estate problem or you're searching real estate listings as a potential buyer, it's important to know the difference between a foreclosure and a short sale. Foreclosure is a worse fate than a short sale if you are the seller, but as a buyer of a distressed property, a short sale is often the more difficult process to wade through.
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Foreclosure for Owner
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A property that has been foreclosed on means that the owner was not able to make the monthly mortgage payments for a certain amount of time and the lender has taken control of the property. How much time you have without making a payment before your property is seized and sold at auction varies from state to state, per Realty Trac, usually between 4 months and 1 year. This grace period is called pre-foreclosure. Once pre-foreclosure ends and you're unable to make the loan current, your property is lost to the bank.
Short Sale for Owner
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You can stop a foreclosure by considering a short sale. A bit of a misnomer, a short sale is actually a lengthy process in which the distressed owner makes an agreement with the lender to sell his house for less than he owes. Since foreclosures are more expensive for lenders, they often agree to the short sale and forgive the balance owed from the owner, though certainly not always. However, a very important consideration is that in many cases the IRS considers the balance forgiven to be taxable income and you will owe tax on that amount.
How Your Credit Is Affected
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With both foreclosure and short sales, your credit is affected negatively. For a foreclosure, you can expect your FICO score to drop by as such as 200 and stay on record for up to 10 years. Future lenders generally look at a foreclosure as very serious and in the vein of bankruptcy. However, you're not out of the woods with a short sale either; your score can drop at least 75 points, most likely more, and if you have defaulted on payments prior to the short sale agreement, it's possible other areas of your credit have been affected, such as higher credit card interest rates. However, it is generally considered less serious than a foreclosure, and it carries fewer stigmas. Both types of default are considered as "not paid as agreed," so they will both severely impact your credit score, according to MyFICO.com.
Buying a Foreclosure Property
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In many cases, foreclosure properties are sold at auction. If not sold at auction, then the property is simply owned by the lender, often called REOs or real estate-owned properties. In either case, the seller or owner is taken out of the equation and the buyer only negotiates with the bank or lender, unlike the short sale where there is owner involvement. It's often safest to buy directly from a bank, instead of at auction, to avoid money pits with unknown issues, such as tax liens, structural problems and the like.
Buying a Short Sale
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Don't be fooled by the name, the process of a buying a short sale property is a very long one. Once the owner accepts an offer, he sends it to the lender for approval. Even if an owner accepts your offer, the lender's approval is the one that matters and that can take quite a while. There is more paperwork involved in a short sale than a regular sale, or even a foreclosure, and lenders tend to drag their feet on short sales, according to Forbes' Investopedia. Make sure you use a realtor who is knowledgeable in short sales, as there are many nuances to completing a short sale successfully.
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References
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- Photo Credit Sold Home For Sale Sign on Burst image by Andy Dean from Fotolia.com
Comments
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So many people are uninformed and needing sound advice. I'm considering doing another public seminar to help educate those who don't understand the ramifications of walking away from their property.
