What are Short Sales & Foreclosures Differences
We usually come across the terms foreclosures and short sales in real estate, but not many people know what they are, let alone the key differences. Well, they are both options for people who fall behind on mortgage repayments, but it is important to know the differences between the two.
So, What is a Short Sale?
Simply put, a short sale occurs when the borrower owes more on the mortgage than the current value of the property. During this procedure, they are asking the lending institution to accept a lesser amount than the total amount owed. If the lender agrees to the terms, the debt will be settled, and the owner will be free from any liability once the sale is closed.
The average short sale takes about 90 to 120 days or even longer. This is primarily because the lender will not agree to the sale without the owner agreeing to demands such as paying for renovations and repairs, closing costs, etc. Other than the involvement of the lender, a short sale will proceed just like any other sale.
What is a Foreclosure?
This is a legal procedure that occurs when the homeowner fails to make mortgage repayments for a certain period.
After 3 to 6 months of failed payments, the bank will send a Notice of Default to let the homeowner know that he or she is a risk of foreclosure. After getting a Notice of Default, the homeowner can try and settle the debt through a short-sale or by paying the amount they owe. This period is commonly known as pre-foreclosure, and it can last anywhere between 30 to 120 days after the notice.
If the amount owed isn’t paid, the bank will intervene and schedule a foreclosure auction to sell off the property. These auctions are advertised in local newspapers and are usually held at the property or in the local courthouse.
So, what’s the difference between short sale and foreclosure?
Both are financial options for a property owner in a financial crisis, but each has a different approach and will have different repercussions. A short sale happens when the lending institution allows the homeowner to sell the property for less than the amount they owe. Foreclosure, on the other hand, is the process of repossessing the property.
Short-sales tend to take up to 52 weeks to close while foreclosures tend to move along quicker due to the bank’s intent to recover the money.
For people who find themselves in a mortgage issue, a short-sale is way less detrimental to their credit score compared to foreclosure. Those who go through the short-sale procedure often purchase another property without being forced to wait for years, although acquiring a second mortgage can be quite tricky. On the contrary, a foreclosure will remain on the individual’s credit report for seven years, and they will have to wait for five years to purchase another property.
If you are facing financial hurdles and find it hard to pay your mortgage bills, it’s best to discuss your situation with your lender. Banks are usually willing to create a plan of action based on your situation and the foreclosure laws in your region.