What is the difference between a short sale and a foreclosure?
Short Sales and Foreclosures are two financial options available to homeowners who are late on their mortgage payments. There are different reason why homeowner would choose for a short sale versus a foreclosure. In both cases, the owner is forced to part with the home but the timeline and other consequences are different in each situation. Regardless of which approach you choose, always get legal and tax advice before deciding between a short sale and a foreclosure.
Short sale, also known as a pre-foreclosure, is a sale of a property for an amount that is less than is owed on the loan secured by that property. It is often used as an alternative to foreclosure because it mitigates additional fees and cost to both creditor and borrower. If your mortgage company agrees to a short sale, you can sell your home and pay off all your mortgage balance with the proceeds. In lieu of a foreclosure, banks will often settle for a short sale, because from a lenders perspective, it’s better to recover a portion of a mortgage loan than to absorb a total loss. Allowing both the lender and thehomeowner to end up in a better position. The negative impact on the borrower’s credit score is typically
smaller in a short sale than in a foreclosure, however, a short sale usually involves a lot more paperwork for all parties.
Advantages of a short sale:
• You no longer have a mortgage payment
• You are in control of the sale, not the bank or lender.
• You will spare yourself the social stigma of the “F” word, foreclosure.
• You can buy another home in 2 years, rather than 5-7 years, if you foreclose
• You save yourself the costs and fees usually associated with foreclosure.
• Your home sale will be handled like any other home sale, with respect and dignity.
Foreclosures are initiated by lenders only. The lender takes possession of the property, which was guaranteed as collateral for the loan. Many foreclosure takes place when the homeowner has abandoned the home. If the occupants have yet to leave the home, they are evicted by the lender in the foreclosure process. After the property is foreclosed upon, the lender puts it up for sale and uses the proceeds to recover the mortgage balance. Foreclosure takes shorter time to complete than Short Sale, because the lender is concerned with liquidating the asset quickly. Foreclosed homes are auctioned off, where buyers bid on homes in a public process.
Consequences of a Foreclosure:
• Stress and uncertainty of not knowing exactly when you will have to leave your home
• Eviction from your home, you will lose your home and any equity that you may have established
• It will damage your credit, affecting your ability to get credit, new housing and maybe even potential employment for a couple of years.
• You will lose any relocation assistance or leasing opportunities.
• The foreclosure is kept on a person’s credit report, forfeiting your ability to get a Fannie Mae mortgage to purchase another home for at least 7 years.
If you are having trouble making your mortgage payments, you should discuss these options with your lender as soon as possible. Be ready to outline your current hardship and explain the reason and why this is a long-term problem. Your mortgage company will need to understand the reason you are having difficulty in order for them to find the right solution for you.
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