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Short Sales and Foreclosures: What Are the Differences and How Do They Work?

Did you know there are distinct differences between short sales and foreclosures? At first glance, they may seem similar. But short sales and foreclosures are not the same, and they affect the homeowner in various ways. Below, we contrast these two terms and explain why you should consider a short sale over foreclosure.

What Is a Real Estate Short Sale?

The real estate term “short sale” was popularized in 2008 during the Great Recession. Sellers in financial distress or hardship (like a job loss, death in the family, or serious illness) who suddenly can’t pay their mortgage payments may take advantage of a short sale.

With a short sale, the property’s owner tries to sell the house at a loss to pay their debts. If the current fair market value of the house is less than what the owner owes on the mortgage, the owner can try to negotiate with the lienholder to settle the debt for less than what’s owed.

“Easy to remember tip”: The transaction is called a short sale because the seller comes up “short” on paying back the balance owed to the lender.

What Makes a Short Sale Different From a Traditional Home Sale?

Short sales often start the same as a traditional home sale. The seller will contact their real estate specialist about listing their home for sale. However, things begin to change after that. Here are a few differences between short sales and traditional real estate transactions:

  1. The required marketing period and solicitation of offers are different. The lender will ensure they accept the best offer to recoup the most money.
  2. The lender, not the seller, has the final say in accepting and approving offers on the home.
  3. If more than one mortgage takes a loss, mutually agreeable terms must be found for all parties involved. So, the seller and their real estate specialist must spend some time negotiating with their lienholders.
  4. Traditional home sales take around 30 days, while short sales take, on average, 120 days.
  5. Short sales lack flexibility because the seller must deal with the lending institution throughout the transaction.

What Is a Foreclosure?

When you buy a house and use a mortgage, the bank that lends you the money is your “partner.” They have ownership rights to the property until the mortgage is paid-in-full and their lien is released. Foreclosure happens when someone stops paying their mortgage payments, and the bank takes legal recourse to protect their investment.

Like a landlord evicting a tenant for non-payment of rent, if the bank goes long enough without receiving mortgage payments, they will take legal action to reclaim the property from the non-paying owner. When this happens, the property is “foreclosed on.”

Typically, the property is sold at auction to the highest bidder so the bank can recoup as much of the original loan amount as possible. A foreclosure can drop someone’s credit score by 85-160 points or more and remain on their credit report for seven years.

How Are Short Sales and Foreclosures Different?

As mentioned, a foreclosure happens when someone stops making their mortgage payments and takes no constructive action with the mortgage holder. If the lender goes long enough without receiving mortgage payments, they will take action to reclaim the property from the non-paying owner to protect their interest in the asset. The process sometimes results in the owner being physically removed from the home or the property being sold with the owner still living there. Yikes!

However, with a short sale, the homeowner works with the mortgage holder to find the best-qualified buyer willing to pay the most for the property. Because they cooperate in assisting the bank in recouping as much money as possible, they can vacate on their terms. Additionally, a short sale reports differently on the seller’s credit from foreclosure – many people are able to re-qualify for a mortgage in only 12 months.

What Are the Benefits of a Short Sale?

You may wonder why someone would short-sale their house rather than walk away and let the bank take it back through foreclosure. Check out the benefits of exploring the option of a short sale:

  1. Short sales have a less detrimental impact on the homeowner’s credit score.
  2. A short sale doesn’t stay on a credit report for as long as a foreclosure, allowing you to recover more quickly.
  3. Despite what most people think, a short sale doesn’t always require you to be behind on your mortgage. You can often get out of an unaffordable situation before the adverse financial reporting escalates.

Do You Have More Questions About Short Sales?

Three hundred twenty-four thousand properties were foreclosed on in 2022. But there’s good news: If you’re enduring financial hardship, you don’t have to be a part of this statistic. Instead, explore the short sale option before it’s too late.

Our real estate professionals specialize in handling short-sale properties. We would be happy to assist you with the short-sale process: You can even book a confidential consult today to discuss your options. Lastly, remember to check out more of our helpful blog posts, which discuss the one thing you should do when preparing to sell your home, how to unpack after moving, and more.

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