Neither the prospect of a foreclosure or a short sale will leave a homeowner with warm and fuzzy feelings. Both of them can present difficult challenges that may take years to overcome but they both have very definite and unique advantages as well. There are pros and cons for each so if you’re in a position where you are faced with losing your home it is strongly advised that you weigh both options to determine which one might best suit your particular circumstances. Even among the two options no two deals will be exactly alike so it is important that you fully understand the choices you have and consult with a financial adviser that you trust to guide you in the right direction.
What is a Foreclosure?
When a homeowner is unable to consistently maintain their mortgage payments, or regularly falls behind the lending institution will foreclose on the property and reclaim ownership. They will then try to recoup their losses by reselling the property at an auction or through a real estate agent, sometimes at an even lower price. In the case of a foreclosure the lending institution actually takes ownership of the property.
What is a Short Sale?
A short sale on the other hand is a favored alternative to having a home foreclosed on. With a short sale the homeowner retains title to the property but in the process will incur additional fees. The property is usually ‘underwater,’ which means that the value is less than the remaining balance due on the mortgage and so the chances of the homeowner recovering financially are pretty slim. With the approval of the lending institution, a short sale allows the homeowner to resell the value at an amount lower than the actual market value of the property. Both the seller and the lender take a loss on the property.
Steps to Foreclosure
In a foreclosure the lender claims ownership of the property and then resells it. This is done through a Notice of Default, a document that informs the homeowner that they are facing foreclosure and gives them an specified amount of time for them to file a dispute or bring the balance current. If this is not done within three months the next step is the Notice of Sale. At this point the property can be sold to the highest bidder who must pay the loan in cash. The opening bid of a foreclosed property at auction is usually the balance remaining on the property plus any attorney fees.
Short Sale Procedure
With a short sale the homeowner retains ownership and lists the property himself. This type of transaction is similar to any other type of home sale; the potential buyer makes an offer and an agreement is made. The difference however is that any agreement between buyer and seller must get a final approval from the mortgage holder itself before the deal can be guaranteed.
Short sales are often priced around a 10% discount from the average home on the market while foreclosures could go for as much as 30%. When properties are foreclosed on the resell price is usually indicative of the balance remaining on the mortgage and payment is always made in cash. The buyer may be expected to pay back taxes on the property if the previous owner has not kept them up to date.
With short sales, properties are often sold for less than the appraisal price but it may take much longer to get through all the additional paperwork and get the approval of the lending institution. While a foreclosed property could be completed in a matter of weeks and sometimes days, a short sale property could take as long as a year to get through all of the red tape. There is also a greater risk in foreclosures as the bank has the option of revoking its decision at any time leaving the homeowner again in a financially precarious position.
Both transactions will bring harm to the homeowner’s credit rating causing it to make a drastic drop. Foreclosures can fall at least 200 points at the very least and will more than likely remain in place for up to 7 years while short sales can drop a minimum of 50 points leaving negative comments for the buyer to deal with.
While both of these types of deals can rescue a distressed homeowner they can both leave them with many unwanted scars from the entire process. If you’re a homeowner looking for a viable option for your current economic situation it is important that you weigh them both carefully and consult with a financial expert so that you can make an intelligent decision in which direction you should go.