How to Compare Foreclosure and Short Sales

Difficulty: Moderate

Instructions

Step 1

What is Foreclosure?

Foreclosure is the legal process where a lending agency assumes ownership of a property from a defaulted mortgage borrower. When a home-owner has late-payments that violate the terms of their mortgage agreement (check your mortgage for specific terms), a mortgage company has the right to begin foreclosure proceedings. During the period of foreclosure, the lender is generally obligated to provide 90 days for the borrower to bring their mortgage out of default. After that time, if the mortgage remains in default, the lender will post a notice of public foreclosure auction. The auction will be held no sooner than 30 days after the notice is published. If the auction does not result in a sale, the lender will attempt other sales methods.
Step 2

What is a Short Sale?

A real estate short sale is where a house is sold quickly and for less than market value in an effort to avoid foreclosure. The home-owner wishing to avoid foreclosure through a real estate short sale will have to get the approval of his or her mortgage holder for both attempting to sell and accepting offers. Short sale homes often sell for less than the borrower still owes. For this reason, mortgage lending agencies often will refuse short sales. If a mortgage is current, without any late payments, approval of short sales is rare. The longer a mortgage has been in default, the better the home-owner's chance of getting approval.
Step 3

How Do They Effect Credit?

Unfortunately, both will have a negative effect on your credit. Foreclosure, however, is far more damaging than a short sale. In a foreclosure, it is estimated a home-owner will lose as much as 300 points from their FICO score and the entry of "foreclosure" to describe the status. Damage estimates vary on Short Sales, but generally range between a 80 - 120 point FICO reduction. The short sale will be entered into your credit report, but will be less damaging that the foreclosure entry.
Step 4

What Will I Owe?

There are many misconceptions about foreclosure and financial obligation. Foreclosure does not automatically release a former home-owner from their financial obligation to the mortgage lender. Instead, the proceeds from the sale of the house are applied to mortgage balance (along with banking and foreclosure related fees). If this amount is not sufficient to pay the debt in full, the home-owner is responsible for paying the remaining balance. A home will rarely sell for more than the value of the existing mortgage. In that case, profit from the sale is surrendered to the borrower after all debt to the lender(s) has been paid. Foreclosed property generally sells for 30% of its market value.

Short Sales, similarly, only release a borrower from debt if the sale is sufficient to pay off the lender(s). Like foreclosure, continued debt or profit depends on the sale price of an individual property. Short Sales vary in percentage of the market value, but one can generally expect significantly less for their property than in a regular real estate sale. Because short sales provide the buyer an opportunity to inspect the property and time to arrange financing, they generally yield more than a foreclosure auction.
Step 5

5. Borrower Obligation ~

In foreclosure, the borrower has little input. The lending agency or mortgage holder initiates the proceedings. They are responsible for all legal efforts to transfer ownership and evict a borrower from the property subject to foreclosure. The borrower need only comply with court orders such as the order to vacate the property.

In a Short Sale, most of the responsibility lies with the borrower. It is the borrower's responsibility to seek initial approval to attempt a short sale. The borrower must seek buyers and present the property, or they must hire an agency to do this for them. When offers are made, the borrower must submit the offer to the lending company or mortgage holder for final approval of the sale. The borrower must also keep the property in readiness for viewing by potential buyers.
Step 6

Real Life Differences ~

In foreclosure, a borrower is permitted to reside at the property until issued a court order to vacate the premises. The lending agency or mortgage holder is not permitted to access the property until the transfer of ownership is complete. In essence, a defaulted borrower will be allowed to remain in the home for 3 - 6 months after the foreclosure process has been initiated.

In a short sale, the borrower is obligated to vacate the home according to the terms of the sale. In most cases, this will be 30 days after the sale. However, in some cases, like cash buyers, the borrower may be obligated to leave the premises within days. It is vitally important to know the terms of the sale.

Also, in short sales, the borrower will have to make the property available for viewing. This may mean leaving your home for an hour or two several times a week. It may also mean your home will be subject to inspection for buyers who plan to use mortgage financing.

Comments

ERS4147 said

on 9/10/2008 Does the IRS tax a short seller on the forgiven debt on a short sale of a home. for example: the owe amount is 250,000 and the bank accepts a new buyer at 225,000? would the short seller be taxed on 25,000 by the IRS?