8 Major Differences Between a Short Sale and a Foreclosure in 2019

By Jack Thomas
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Short Sale vs Foreclosure



Discover the differences between a real estate short sale and a foreclosure. They’re commonly confused!

When it comes to real estate, it’s not uncommon that two or more terms are mixed up. Not everyone is a real estate expert.

However, when the time comes that you purchase your first home, or deal with a foreclosure, you’ll want to know all the details regarding simple real estate processes.

In particular, when it comes to a short sale and foreclosure, many believe they are the same. But they are actually related yet distinct terms.

 

Short Sale

The simple definition of a short sale is the selling of a home that is going through the foreclosure process. Before the process begins, it is agreed upon by the current owner and lien holders.

The idea of a short sale is that the property is taken off the owner’s hands before a foreclosure auction begins (the final stage of a foreclosure).

The sale assists the owner in paying back a segment, or all if they’re lucky, of payments overdue on their property. Lien holders of the property may agree to take less and will forgive the rest of the loan.

Lien holders are benefited from a short sale in that they immediate payment, even though it is most often less than what is owed to them.

 

Foreclosure

A foreclosure that doesn’t end in a short sale is often 1) recovered by the homeowner in the case that they pay their dues or 2) sold in an auction.

If the home is sold in an auction, the current owner loses their deed to the home, and it is bought by someone else.

Knowing this information, a foreclosure is a process in which the homeowner cannot pay their property expenses on time for a specific period.

A foreclosure on their property means that it is in danger of being taken out of their hands if they cannot make a full repayment before the auction begins.

 

8 Major Differences Between a Short Sale and a Foreclosure

1 General Definition

A short sale is one way to avoid a foreclosure while a foreclosure is the risk of having your home taken away. A foreclosure is a process that can be ended in many ways, or followed through with if nothing can be done.

However, a short sale is one way a foreclosure can be avoided. Both a general foreclosure that ends in an auction and a short sale do have things in common.

For one, they are both related to real estate. Two, short sales are due to a foreclosure. What makes them different in their definition the most is that they do not always occur concurrently nor are they the same.

Think of short selling as an ending, or avoidance, to a home foreclosure. Think of foreclosing as an issue that may or may not end in the homeowner losing their home, but rather, the lead-up to it if nothing is done.

 

2 Timeline

Foreclosures are a longer process than a short sale timeline. One benefit of short selling is that it ends the foreclosure process.

Say you have a few weeks until your foreclosure auction, the date in which your home may be sold to someone else.

If you decide on a short sale instead, you will sell your home faster before waiting for the foreclosure to end naturally.

This is often better for both the delinquent homeowner and the lender as stress and time are reduced.

 

3 Selling Price

Foreclosures ending in an auction usually have a starting bid on the payment owed on the house. Short sales are sold for cheaper.

Beneficial for the current homeowner, short sales are sold for cheaper than they would be if they went through a foreclosure auction.

This means the homeowner will only have to pay the money they made off of the short sale to their mortgage lender.

This is because it was agreed beforehand the lender would take less than what they were owed by doing a short sale.

If a homeowner decides to just go through with the full foreclosure process, they will still owe the lender the full balance they owe them.

If the highest bid on a home is lower than the amount owed to the lender, the homeowner will pay that amount made plus whatever else due.

However, going through a short sale means you won’t have to pay outstanding costs, just whatever your home is sold for.

Although a mortgage short sale may sound most beneficial, it’s important to note what happens if extra money is made through a foreclosure auction.

Consider that a starting bid (what is owed to the lender) on a foreclosed home is set at $100,000.

If the highest bidder bids at $150,000, that extra $50,000 will go to the original homeowner as the owner only owes $100,000 in debt to the lender.

Homeowners will miss out on this potential if they short sell instead; they’ll be left with nothing.

 

4 Repayment

A foreclosure ending in an auction means all dues will be repaid to the lender, but an approved short sale means not all will be.

One bonus for homeowners is that the repayment they must make to their lender through short selling is lower than a foreclosure.

However, to short sell, lien holders must agree to take less to end the foreclosure.

To go through the full process of a foreclosure, on the other hand, means you will have to pay the entire debt due, even if your home bids for less.

 

5 Credit Score

Short sales most likely will have less damage to your credit than foreclosures. Simply put, short selling ends in less damage to your credit score in most cases.

Going through the full foreclosure process looks worse for homeowners.

 

6 The Ending

All short sales end the foreclosure process, but not all foreclosures end in a short sale.

Short sales are done to end the foreclosure process. However, not all homeowners will choose a short sale when it comes to risk of foreclosure.

There are other alternatives that can stop foreclosure. Here are 4 methods to stop a foreclosure auction before it starts.

A foreclosure may be halted, avoided, or be finalized depending on what the homeowner does.

 

7 Record

Short sales won’t list “foreclosure” on your records.

Following through with the entire foreclosure process means your records will list that you dealt with foreclosure.

This listing will not be erased for about 7 to 10 years, which looks bad on your part.

A short sale will not having a foreclosure listing as a foreclosure was avoided.

 

8 Eligibility to Purchase Another Home

Short sellers are eligible to purchase another home sooner than those who have foreclosed.

Those short selling will have eligibility to purchase another home in two years versus the 5 to 7 years full foreclosure owners will go through.

As you can see, this may be a major deal-breaker for those at risk of foreclosure.

 

Conclusion

Generally, short sales and foreclosures are two processes that are stressful and not something anyone will want.

However, when risk of foreclosure arises, a homeowner may make the decision to follow through with a foreclosure auction or to short sale instead.

A short sale and a foreclosure in real estate are different, but interrelated in some cases. It’s important to remember that a foreclosure means risk, or completion, of having your home taken away due to lack of payment on your property.

However, a short sale is the selling of a risk-of-foreclosure property before the foreclosure finalizes. Both have their benefits and downsides; however, it comes down to the process the homeowner seeks to take.

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Written By Jack Thomas
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