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What is the difference between short sale and foreclosure?

By Trulia | Published: Oct 14, 2009 | 13 Comments

If you have found yourself behind on mortgage payments recently, chances are you have been anxiously debating your next step. Do you let the bank take the home back, hand them the keys, and ride off into the sunset, or do you think more creatively and consider other options? Rather than tossing the dice on your financial future, let's explore the difference between a foreclosure and a short sale.

Foreclosure: A foreclosure is the legal term used to describe how a note holder (your bank or lender) goes about stripping you of the title to your home. In the real world the process can take anywhere from a few months to well over six months from start to finish, depending on the type of financing instruments that were used to secure the debt. But losing your home is only the beginning. Once completed, depending on the borrower, a foreclosure can also result in a credit score reduction of 200-300 points. This means you will have a much more difficult time securing credit in the future when you wish to purchase a car, obtain lines of credit, or even get new credit cards. When you do find someone to give you a loan, be prepared to pay much higher interest rates. To top it off, if you are searching for a job, be aware that many employers conduct a credit check on new hires and a poor credit score can be used as a reason to toss your resume.

So if a foreclosure is so bad, what other option can a homeowner consider? Many homeowners use a short sale to avoid a foreclosure.

Short Sale: A short sale, sometimes known as a "pre-foreclosure sale", occurs when a bank agrees to accept less than what is owed on a home in order to avoid a foreclosure. Remember, lenders don't want to own your home. Because of this they will often accept a reasonable loss to avoid the costs and hassle of adding another home to their growing national inventory. Though a short stale will still hurt your credit score, it will be looked upon by future creditors far more favorably than a foreclosure. For instance, Fannie Mae recently adjusted their guidelines to require only a two year waiting period for sellers who used a short sale to purchase a new home. At the same time, they lengthened the waiting period for sellers who have fallen victim to a foreclosure to five years. Why the difference? A short sale is seen as a satisfaction of at least part of the debt, rather than a complete write down. In addition recent federal legislation, in most cases, has removed the burden of a tax liability for the forgiven debt on primary residences.

So which is better a foreclosure or a short sale?

Without question a short sale is almost always the best option. To explore using a short sale to sell your home, talk to a local agent, preferably one with experience in pre-foreclosure sales, and request a short sale package from your lender as soon as possible.

Comments

By Shirley037,  Thu Feb 4 2010, 06:31
This is a great post. People should be able to identify the difference now between foreclosure and short sale. Additional reference that everyone can bookmark: http://www.reversethatforeclosure.com

Hope this helps.
By www.AtlantaMyHome.com,  Sat Apr 17 2010, 20:58
short sale is very good choice in today's market http://www.realestate-home.com
By J. Mario Preza, CRB, CDPE,  Sat Aug 21 2010, 17:51
A concise explication about an all too common ocurrence in today's real estate market. You may also want to add that there are some potential pitfalls with either of these purchase options and the fact that these methods of sale/purchase leave a little uncertainty of a few things, e.g., the inordinate about of time a lender for a short sale takes to make a "selling" decision -- sometimes as much as 6 to 7 months, or worse, the fact that a REO sellers ("Real Estate Owned, the term lenders who foreclosed and own the real estate being sold use) typically sell their inventory 'AS-IS" and make few allowances to the buyers.

The way real estate is bought and sold has changed as a result of services like Trulia, but more because of the influence of the economic difficulties of late.
By Aaron Heard,  Mon Oct 18 2010, 13:28
Here are some stats that are very interesting concerning Foreclosure vs. Short Sale's Homeowner Consequences...

Issue: Future Fannie Mae Loan for Primary Residence...
Foreclosure: A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years...
A successful Short Sale: A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.

Issue: Future Fannie Mae loan Non primary...
Foreclosure: An investor who allows a property to go to foreclosure is ineligible for a fannie mae backed investment mortgage for a period of 7 years...
A Successful Short Sale: An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years...

Issue: Future Loan with ANY Mortgage Company...
Foreclosure: On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks,"Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?" This will affect future rates...
A Successfull Short Sale: There is no similar declaration or question regarding a short sale...

Issue: Credit Score...
Foreclosure: Score may be lowered anywhere from 250 to more than 300 points. Typically, this will affect a score for more than 3 years...
A Successfull Short Sale: Only Late payments on a mortgage will show and an after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale's effect can be as brief as a 12 to 18 months...

Issue: Credit History...
Foreclosure: Foreclosure will remain as a public record on a person's credot history for at least 10 Years...
A Successful Short Sale: A Short Sale is not reported on credit history. There is no specific reporting item for a "Short Sale." The loan is typically reported as "paid in full, settled."...

Issue: Security Clearances...
Foreclosure: Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA or any other position that requires a security clearance, the clearance will be revoked and the position will be terminated...
A Successfull Short Sale: A short sale on its own does not challenge most security clearances...

My name is Aaron Heard and I have helped dozens of homeowners through the difficult process of negitiations of their short payoff amount to the mortgage holders. Please ask if you have any questions. I am more than happy to share my experiences.

Aaronheard@johnlscott.com Or on my Mobile at 503-752-7671

Source: Distressed Property Institute, LLC, http://www.cdpe.com.
By Maureen Cody,  Wed Jan 12 2011, 15:10
This is a post I'd like to share with my clients.
I get this question all the time and nice to see it address succintly in this article

thank you.

Maureen
http://www.thekeystocharleston.com
By Sarah Klamm,  Sat Mar 12 2011, 19:42
Thank you for the clear explanation that isn't several pages long.
By Diane Harmon,  Thu May 26 2011, 06:08
Great post. I do allot of short sales and actually have this typed up so my customeers can keep this information for later reference. I suggest anyone doing short sales get their CDPE short sale certification. You can log on to http://www.cdpe.com to find the next class in your area. It is a two day course at a cost of $599.00 but for some agencies like KW, Re/Maxx, Coldwell, etc. there is a 200.00 discount ( you have to ask) Allot of banks are starting to require some type of certification for Realtors doing short sales. This is a great class.
By Matie,  Tue Jun 26 2012, 05:42
it's really important to understand the difference beetwen short sale and foreclosure
By opondomusa,  Wed Oct 31 2012, 10:05
Short sale is better than foreclosure.More tips on how to convince your lender to grant you short sale:

http://www.realtypin.com/news/story/786-how-to-convince-your-bank-to-grant-you-a-short-sale
By Joshua Jarvis,  Thu Jan 16 2014, 10:56
To me a short sale is taking action, a foreclosure is doing nothing. http://www.atlantashortsalelistings.com
By David R Indermill,  Tue Apr 29 2014, 09:02
Short Sales are just that, when the borrower owes more than the home is worth and the bank shorts. REO means real estate owned and that is when the bank has foreclosed on a property and now owns it.

Best Wishes,

David R. Indermill

Re/Max Hall Of Fame, CDPE | Since 1998 | Luxury Real Estate Advisor
International Referrals | Bank Owned Assets | Off Market Properties
Large Cash Investor Fast Close Network | B.R.E License # 01232827


http://www.SanDiegoHomeStore.Com

Cell: 858-414-LIST (5478) Texting OK
Fax: 858-430-5544
Email: david@sandiegohomestore.com

http://www.trulia.com/profile/sandiegohomestore/
By David R Indermill,  Tue Apr 29 2014, 09:03
Short Sales are just that, when the borrower owes more than the home is worth and the bank shorts. REO means real estate owned and that is when the bank has foreclosed on a property and now owns it.

Best Wishes,

David R. Indermill

Re/Max Hall Of Fame, CDPE | Since 1998 | Luxury Real Estate Advisor
International Referrals | Bank Owned Assets | Off Market Properties
Large Cash Investor Fast Close Network | B.R.E License # 01232827


http://www.SanDiegoHomeStore.Com

Cell: 858-414-LIST (5478) Texting OK
Fax: 858-430-5544
Email: david@sandiegohomestore.com

http://www.trulia.com/profile/sandiegohomestore/
By Jim Cramer,  Wed Jul 2 2014, 07:59
Good article to clear up the questions that many home owners have. It is very important for them to understand the difference and what it can mean to them!

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