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The Differences Between Short Sale and Foreclosure

The Differences Between Short Sale and Foreclosure

If the American dream was once to be able to buy a home and one day own it free and clear, then the American nightmare would be to have financial problems take it all away from you.

Even in this seemingly stable economy, if you’re among the multitudes of households who have found yourself in certain financial straits, and it comes down to whether you bail out of your mortgage or try to sell your home for what you can. Know the facts before you pull the ripcord.

You can use this menu to skip directly down the page to the topic of most interest to you:

  1. What is a short sale?
  2. What is foreclosure?
  3. What are the main differences?
  4. Who qualifies for a short sale?
  5. What are the drawbacks of short sales?
  6. What are the drawbacks of foreclosure?
  7. Behind on Payments? Contact Real Estate by Design Idaho today.

What is a short sale?

In the real estate world, a short sale is when a property sells for less than what is owed on the mortgage. This typically occurs when the homeowner can no longer make the payments and they do not have equity in the home for some reason such as a loss in value.

A short sale can be a way to avoid dire measures like going into foreclosure or bankruptcy. It is used in situations where people know they won’t be able to continue making the mortgage payments because of major changes in their financial health, such as being laid off, fired, divorce, major health expenses, or other financial troubles.

The structure of getting rid of an “underwater” mortgage, another reference for short sale, can be daunting, but it may be getting easier. Early in 2018, legislation was introduced to improve the handling of such mortgage issues. According to the National Association of Realtors, the “Fast Help for Homeowners Act” requires a lender who has a mortgage with a second loan on it to expedite a decision within 30 days. This new bill will be influential in speeding up the short sale process. When time equals money in the buying and selling of property, getting it done efficiently shaves additional grief and expense for all parties involved.


What is a foreclosure?

A foreclosure is when the lender, typically a bank, takes back the home after the borrower is unable to make their mortgage payments for a period of time. This usually involves the bank contacting you via mail to let you know that they are going to begin taking action if you aren’t able to pay off the amount owed and any late fees in the next couple of months. Eventually, if you aren’t able to work out another arrangement, the bank will take back your home and force you to move out.

It’s important to note that your home won’t go into foreclosure if you make a payment a few days late or miss one, or even two payments. Generally, the foreclosure process will start after three missed mortgage payments. Unfortunately, unless a homeowner receives some kind of financial windfall, it becomes increasingly difficult to catch up with consecutively missed house payments. However, it can be possible depending on your situation and finances.

Foreclosure typically happens when the present homeowner has fallen behind on their mortgage payments because of extremely difficult situations such as job loss, death, emergency medical issues, or divorce which can leave a borrower emotionally and financially strapped to the point they can no longer afford to keep the house payments current. These are all devastating issues to go through and the loss of the home can make them even more difficult. For most borrowers, contacting a professional is necessary when you can no longer make your mortgage payments. They will be able to navigate you through the process, relieving some of the additional stress.

Many Americans will experience foreclosure at some point, especially during periods of extreme economic instability. However, you should be aware that foreclosure is not your only option when you are behind on your house payments. There are other solutions that may be better for your unique situation and cause less dire consequences.

One important note is that foreclosure can prevent you from acquiring another mortgage for about seven years because your credit worthiness will generally take a hit after this happens. If you must go this route know that you will recover financially from it, although it does take some time.


What are the differences between short sales and foreclosures?

Here are the key distinctions between the short sale and foreclosures:


Credit score Less affected (case by case) Severely affected
Initiated and sold by The Borrower The Lender
Property is controlled by The Borrower The Lender
Can aquire a new mortgage After about 2 years After 5 – 7 years


Generally, short sales are the best option for the homeowner who is falling behind on their mortgage payments. It gives you more control of the process, allows you to purchase a new home sooner, and usually has less of an impact on your credit score and financial history, meaning that you’ll be able to get back on your feet sooner.

Foreclosures give the bank or lender most of the control. You may not be well-informed about the process and experience surprises along the way, including having to move out of the home with just a few days’ notice in the event that the lender sells the home while you are still living in it. Your financial history will be more severely impacted, and it will take much longer for you to be able to buy a new home in the future.


Who qualifies for a short sale?

Because short sales are initiated by the present homeowner, and not something that is done by the lender, this is generally the best method to avoid having the bank step in and controlling the process and the home.

However, the lender still has some control over the short sale process and you must meet some criteria for a short sale. The real estate has to be in default with a few missed payments on the books. You also have to prove financial hardship such as bills, late notices, and any other documentation asked for which shows that you don’t have the means to continue paying the mortgage.


How can a real estate agent help with a short sale?

Falling behind on mortgage payments is never an easy situation to deal with, but a realtor can make the process easier. Here are just a few ways the real estate agent can help:

  • Assist with the paperwork
  • Explain the qualification requirements
  • Help you set a realistic selling price
  • List your home on the market and find a buyer
  • Negotiate the sale with the bank
  • Save you the expense of a lawyer in many cases
  • Advise you throughout the process
  • Answer your questions

Unfortunately, some inexperienced or unscrupulous agents may engage in poor practices like not making sure the seller is qualified for a short sale or listing the property at too low of a price. That’s why finding an experienced real estate agent such as those with Real Estate by Design who have extensive history with short sales and other distressed properties is so important.


What are the drawbacks of short sales?

Although short sales are generally much more favorable for someone who is in financial distress, this is still a complicated process that takes time to complete. Some of the detriments to consider are:

  • Your lending institution may not initially return your calls or even get back to you. Banks don’t like to take a hit on their bottom line by selling a house for less than what is owed. You may need to be persistent so you aren’t ignored by the lender.
  • The lender could counter-offer or even reject your offer. Then it’s back to the drawing board to learn what the bank wants and how you can get another buyer to hopefully provide it.
  • Some states allow the bank to issue a “deficiency judgement” in which the lender attempts to get any amount lost on the property back from the original owner.
  • Despite the name, short sales can still take weeks or months to complete.
  • The process is complicated and you may need to consult a professional for help.
  • Although the credit impact is typically far less than in a foreclosure, your credit will likely be damaged by a short sale.
  • The process of a short sale requires that you must show the bank economic hardship and why you need to sell the home for less than what is currently owed. The lender can also decide you still owe the difference of the mortgage still left on the books.
  • Often the amount of paperwork to implement a short sale is the same as selling a house normally, but with a few modifications.
  • Like any major transaction, there can be snags with the process, especially if the documents are incomplete or illegible, so solid documentation is a good practice to have.
  • Though this method is initiated by the current owner of the house, the bank must first give it the green light because you can’t sell your home without their blessing.
  • There are possible tax implications. Lending companies have been known to issue their borrowers a Form 1099 at the end of the year, which can show that the amount of debt forgiven is counted as taxable income.

Although there are certainly some drawbacks to short sales, they are only considered when the homeowner is already in serious financial distress, limiting the options available to them. Overall, a short sale is almost always preferable to foreclosure, and it can minimize the negative consequences that come along with being unable to continue making mortgage payments.


What are the drawbacks of foreclosures?

  • Your credit will be substantially negatively affected. You may need to spend years and consult professional credit advisors to repair your financial history.
  • Other loans such as car loans or credit cards may be more difficult to obtain, have higher interest rates, or have lower limits due to the damaged credit score.
  • Some services like car insurance that use your credit score may increase.
  • It won’t be possible to buy a new home for 5-7 years and it may be more difficult to be approved for a loan. However, if an extreme situation caused the foreclosure, the waiting period may be able to be reduced if you have documentation for the event.
  • The amount that was foreclosed may be considered as taxable income for the next year’s taxes, meaning you’ll need to pay taxes on that amount.

Although foreclosure is a difficult situation, it is not impossible to recover from. However, it will take some time and make your life much more difficult for a substantial period of time afterward.


Contact Real Estate by Design today

If you are falling behind on your mortgage payments in the Boise, Idaho area and facing the possibility of having the lender take back your home, finding reputable guidance is paramount. An attorney or CPA can guide you with the legal stipulations, but you will also need to find a realtor with years of experience and knowledge. Real Estate by Design can guide you through this complex process.

Make the entire process of going through a short sale or foreclosure less painful by utilizing the help of a realtor who just doesn’t sell houses, but is a Certified Default Advocate as well: William Lowery. He is a professional with over 200 transactions on distressed property since the market crash of 2009. He has extensive experience with short sales, foreclosures, and other distressed property matters. His understanding of the real estate market makes him a much sought-after broker. Hundreds of Boise and Treasure Valley area homeowners have relied on him to buy and sell homes in Idaho. Contact Real Estate by Design today to start the process of getting your life back from financial struggles.


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