Short Sale or Foreclosure? What’s the Difference?

Short Sale or Foreclosure? What’s the Difference?

Distressed homeowners can get confused between a short sale and a foreclosure. Don’t make the mistake of thinking they are one and the same.

In a short sale, the homeowner, who is in default or nearing default with their mortgage, is the one selling the home but at a price that is lower than the amount still owed in mortgage. The short sale is subject to the approval of the lender or bank. If a short sale is approved by the bank, that means the bank is willing to accept a price lower than the amount of mortgage still owed on the house as settlement and may forgive the remaining balance. Banks and lenders do this to avoid foreclosure proceedings which take longer and cost more.

On the other hand, a foreclosure happens when a homeowner is unable to pay the monthly mortgage (and has stopped making payments) of their and the lender serves the homeowner a foreclosure notice. The lender sells the property through court proceedings at an online auction (some states may sell the at the courthouse) so the lender can recover the debt owed by the homeowner.

One main difference is with a short sale, the sale is initiated by the owner and is sold through a short sale agent while with a foreclosure, the bank acts as the seller and the home is auctioned at a trustee sale.

Both short sales and foreclosures have a negative impact on the homeowner’s credit score, although a foreclosure has a greater negative impact since it can reduce credit score by 200 to 400 points. A short sale reduces a credit score by only 50 to 150 points.

Short sales may not necessarily be mentioned in future loan applications while it is mandatory to report foreclosures in future loan applications.

A homeowner who has gone through a short sale can immediately be eligible to buy a new home under certain conditions while an owner with a foreclosed home becomes eligible to purchase a new home within 5 to 7 years.

Short sales and foreclosures both fall under distressed properties but both are very different from each other. There are more benefits of doing a short sale over a foreclosure.

If you want to know more about short sales or need the help of a short sale expert, Call me, Debbie James at 850-450-2000. Let me help you avoid foreclosure by guiding you through the short sales process.

Debbie James
Broker Associate
Somers & Company
Accredited Luxury Home Specialist
“When Quality Service & Experience Matter”