What is the Difference Between a Short Sale and a Foreclosure?

Short Sales vs. Foreclosures: What's the Difference?

Real estate is an ever-changing market, and the housing crash of 2007 left lasting effects on home prices and financing. This meant that many homeowners were stuck with their homes underwater (where they owed more than the house was worth) or unable to sell their properties. Short sales and foreclosures are two common ways for homeowners to get out from under their mortgage, but there is a lot of confusion about these processes. In fact, it is not uncommon for someone to ask, “Is a short sale the same as a foreclosure?” The quick answer is no. Many are unclear about either option. Both a short sale and a foreclosure leave the property owner with less financial liability than if they sold it on the open market. 

The main difference between a short sale vs. a foreclosure is how each process affects the property value, lender, and homeowner. If you treat it correctly, you can take advantage of a foreclosure or short sale in order to get the best deal possible when you buy or sell your house. Let’s take a closer look at a short sale vs foreclosure, their pros and cons, and when you might want to pursue either one as an option for your own home loan situation.

What is a Short Sale vs. a Foreclosure?

A short sale is when a seller owes more than the property is worth and the bank agrees to take less than the amount owed. This type of sale is common in areas with high property prices, where it may be difficult to find buyers who have enough cash to pay the full amount for a property. 

Short sales are often initiated by the homeowner’s lender. The lender sets a sale price for the property that’s significantly lower than the owner owes on the mortgage, and the owner accepts the offer. The reduced sale price is subtracted from the amount the owner owes on the mortgage, and the difference is written off by the lender. 

Short sales are sometimes called “deficiency judgments,” because the lender can come after the homeowner for the difference between the amount owed on the mortgage and the amount they received in the short sale. But this only happens in rare cases, like when the homeowner lied on their mortgage application or when the lender believes they are entitled to compensation for their trouble in approving the short sale.

Pros of Short Sales

1. Relief From an Underwater Property - Short sales are often a less expensive option for homeowners who are struggling to make payments on their mortgage in an area where the housing market has dropped significantly. A short sale is a way to get out from under your mortgage by selling your home for less than you owe and absolving yourself of the remaining debt.
2. Eliminate Foreclosure Proceedings - Both short sales and foreclosures involve selling your property at a loss, but only in a short sale will you avoid the embarrassment of going through foreclosure proceedings. Foreclosure proceedings are lengthy and public, and can severely impact someone’s credit rating.
3. Avoid Lender Penalties - The lender may charge significant fees if you default on your mortgage, but these fees often aren’t a factor in a short sale. In some cases, the lender may even choose to waive these types of fees as part of the sale agreement.
4. Reduce the Property Tax Burden - A short sale will reduce your property taxes and allow you to own your home, rather than renting it out. This can be important if you’re planning to sell your home in the future or need space for a new family.

Cons of Short Sales

1. Home Equity Loss - When you go into a short sale, you will lose the equity in your home. This means that the amount of money you put into your home when you bought it (the down payment) will be lost. Additionally, mortgage lenders are more likely to pursue deficiency judgments in a short sale than they are in a foreclosure.
2. Negative Impact on Credit - A short sale places a negative mark on your credit score by removing the equity in your home. Short sales can be difficult to qualify for, and if you do qualify, the time it takes to get approved is usually longer than with a foreclosure.
3. Risk of a Deficiency Judgment - Even if your lender does not pursue deficiency judgments in short sales, you may still have some lingering headaches from selling your home for less than it’s worth.

What is a Foreclosure?

A foreclosure is when a homeowner stops paying the mortgage, and the bank takes possession of the property. This can happen because the homeowner can’t make their monthly payments. 

In most states, lenders have a specified amount of time in which they can take possession of a property. This time frame varies by state, and outcomes vary for both the homeowner and the lender. 

To initiate the foreclosure process, the lender first sends the homeowner a “notice of default.” This warns the homeowner that they have a certain amount of time to either pay the loan in full or make a payment that covers the amount due, plus any fees or other charges. If the homeowner does not respond within the allotted time frame, the lender can then proceed with the foreclosure process. Depending on the state, this may include taking the homeowner to court.

Pros of Foreclosures

1. Clear Title - Foreclosures are often a more efficient way to sell your home than a short sale. The foreclosure process takes less time, and can be much less expensive than a public short sale. In most cases, sellers of foreclosed homes do not have to face deficiency judgments. Title companies will clean up the titles and any liens, so that the home is sold “as is” to anyone who buys it in a foreclosure auction.
2. Quicker Sale - Foreclosures are quicker to close than short sales. Most foreclosure processes are completed within 10 days, whereas a short sale can take up to four months to complete. A foreclosure can be completed within three days in some states.

Cons of Foreclosures

1. Loss of Equity - In most cases, homeowners have lost all the equity they put into their homes when they purchased them. In order to avoid this, the homeowner must either find a cash buyer who is willing to assume all the balance on the mortgage or sell the home as-is at an auction.
2. Negative Impact on Credit - Foreclosures can strike a very damaging blow to your credit score. If you have any outstanding debt, you may be denied mortgage loans in the future, and your personal finances could be severely impacted by foreclosure. 

Differences Between a Short Sale and a Foreclosure

When looking at foreclosures and short sales, it is clear that there are situations where one is better than another. The main difference between short sale and foreclosure is who initiates the process. A short sale is initiated by the homeowner. In some cases, a homeowner may go through the short sale process and then change their mind. In a foreclosure, the lender takes control of the situation. 

A short sale may take longer than a foreclosure. A short sale can take months or even years to complete. A foreclosure, on the other hand, can take as little as a few weeks to be finalized.

When to Go With a Short Sale vs. a Foreclosure

Short sales are often better options for homeowners who can no longer afford to pay their mortgages and have a positive net worth after selling their homes. You may be able to qualify for a short sale if the value of your home is less than what you owe. A foreclosure is a good option when the homeowner has negative equity in the home and they owe more than they could get from selling it at current market value.

If you’re not current on your mortgage payments and you would like to get out from under them, go for a short sale. Short sales are often much more difficult to qualify for than foreclosures, so if this option means you can save thousands of dollars by having the house sold quickly, it’s worth a try. In states where the housing market has taken a steep decline, a short sale is often the only option for homeowners who are struggling to pay their mortgage.

On the other hand, being underwater on a house can have widespread effects on your finances, and a foreclosure can provide some relief. It will likely hurt your credit in the long run, but it can provide some immediate relief in the current time. This can give you time to get your head above water, rebuild your credit, and try again for another house in the future. 

Which Option is Better?

Short sales or foreclosures both have advantages and disadvantages, but you have to compare a foreclosure vs short sale and choose one. You can’t have both at the same time. Short sales can provide more flexibility, but foreclosures lead to a faster turnaround. Ultimately, the decision on what type of home sale is best for you depends on your situation. If you’re struggling financially, a short sale might be a good option for you to avoid foreclosure.

The decision of whether to go with a short sale or a foreclosure may be the most important financial decision you have to make. Both options have benefits and drawbacks. Taking time to weigh your options can help you make the right choice.

It may be possible to avoid either option if you are able to sell your house fast for cash for the right  amount. Home Buyers of America can help with this since we buy houses fast. We’ll take a look at your house and make you a cash offer on your house. That way, you can sell your house AS IS while probably still making profit on your house. We make the process so easy that you can even sell your house without a Realtor. Let us help you relieve your stress when you have to ask to “sell my house fast.”