Short Sale Vs. Pre-foreclosure
For various reasons, it's a fact of life that homeowners can become delinquent on their mortgage payments. If payments continue to be missed, the homeowner can bank on the fact that his lender will eventually foreclose on the house and sell it to try to recoup what it can. In between delinquency and foreclosure, however, lie two points at which a sale of the property can occur without going full cycle into foreclosure. These are known as pre-foreclosure and a short sale.
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Time Frame
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A homeowner who is behind by at least one payment is considered to be in pre-foreclosure status. At this point, it's not likely that a lender will move quickly toward foreclosure, but, technically, you can be certain it has noticed and is thinking about it. A pre-foreclosure advances into short sale territory once two or sometimes three payments have been missed and the lender begins the foreclosure process, which might typically take months or even a year to completely play out. The primary time factor to keep in mind is that a pre-foreclosure sale would happen first and a short sale second.
Advantages
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The primary advantage to the homeowner in conducting a pre-foreclosure or short sale is that, if the lender agrees, the proceeds can be used to completely satisfy the mortgage debt even if the sale price falls short of what is owed on the house. In short, the lender agrees to forgive the balance. A short sale occurs further along in the process but is similar in nature in that the lender must agree to the sale. A big benefit for the seller is that she avoids the prospect of bankruptcy often caused by a full-term foreclosure.
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Disadvantages
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The main drawback to a short sale or pre-foreclosure sale is that the homeowner is probably paying some amount of money to the bank that goes toward the mortgage while the process goes on. This is money that is lost if the short sale falls through, so it behooves the homeowner to decide whether or not the short sale or pre-foreclosure sale has a good chance of going through. If the deal falls apart and the house ends up in foreclosure anyway, that's money gone for nothing.
Lenders
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Depending upon each individual situation, lenders often see a decided benefit in agreeing to allow a pre-foreclosure or short sale to go forward -- and this is the simple idea that a full-term foreclosure costs the bank money and time to conclude. It must balance that cost against the difference it would eat should a short sale or pre-foreclosure opportunity arise. If it makes financial sense to let the home go without a foreclosure, the lender will probably agree to either sale.
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References
- Photo Credit house image by Cora Reed from Fotolia.com
