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Whether you’re a buyer or a borrower/seller, a short sale, and foreclosure each present different advantages and difficulties.
What Is A Foreclosure In , ?
In simple terms… “A foreclose is a legal process that the bank starts in order to repossess the property, if a borrower has stopped making payments on the loan, which is secured by the property.” If someone stops making their house payments… the lender has the right, granted in the mortgage and loan documents, to foreclose on the property so they can attempt to recoup their money that was lent out to purchase the property.
A home is typically foreclosed on when a borrower fails to make mortgage payments, or there is some other major violation of a clause in the mortgage documents. The foreclosure process can take several months to complete ending in a public auction for the property. At the auction, the bank offers the property up to anyone who might want to buy it, typically investors. If there are no bidders or interested parties, the lending institution, or bank, would be granted ownership and possession of the property. After a bank becomes the legal title holder to the property they will usually evict the borrower or tenant so that they can then prepare the property for sale. These properties are often sold utilizing the service of real estate agents, or another form of auction. A foreclosure can damage the credit rating of a borrower, and make it very difficult to obtain a mortgage for many years.
Depending on the state that you live in… a foreclosure can work in different ways. Check out the foreclosure process information over here at the HUD Government website.
What Is A Short Sale?
In a short sale, the home is still owned by the borrower.
The definition of a short sale is… “A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt”
In some cases, a short sale is an option agreed upon by borrowers and lenders. In a short sale, the home is sold for less than the outstanding balance of the mortgage. The unpaid balance (also known as the deficiency) may or may not still be owed by the borrower, this is often negotiated between the bank and borrower during the sale.
Short sales typically take a very long time, 4-6 months is usually fast timeline to complete a short sale. The time factor is due to the slow moving process of banks to collect all the property and borrower data in order to make a decision to accept less than what is owed. All parties who have a stake in the property must agree to the terms of the sale, and a potential deal could fall through if even one lender doesn’t agree. If there are multiple lenders, the process becomes more complex. Additionally not very many buyers want to wait for this long process to finish since there will be no definite finish date at the time the make an offer.
Short Sale vs Foreclosure – Your Options
While both options can cause credit damages, a short sale often has less of an impact on the borrower’s creditworthiness. A foreclosure could impact a borrower’s credit score by 300 or more points, where a short sale may only dent the credit score by 100 points.
Borrowers who are foreclosed on are often ineligible to purchase another home for 5-7 years with a traditional mortgage, where under certain circumstances, a short sale borrower can purchase immediately, but some lenders prefer to have 2 years of history before they will allow a borrower to be eligible for another mortgage loan.
Many Americans remember the struggle from the 2008 housing and economic crash, and folks are having a hard time making monthly mortgage payments, which resulted in mass foreclosures, short sales and evictions. Choosing between being foreclosed and initiating a short sale (or a 3rd option… selling your house fast )is an easy choice for a borrower having troubles paying their mortgage on time.
Sometimes, lenders are willing to work with borrowers to complete a short sale, to avoid the fees and time-consuming process of conducting a foreclosure.
Our suggestion is always this.
- Be Proactive and talk with your lender and discuss ways that they can work with you on your loan. We offer this service where we can help guide you in the right direction if you run into issues with your lender… just reach out to us on our Contact page and we’ll discuss your situation.
- Attempt a short sale or other programs your lender may have that forgives part of your loan, creates a new / more affordable monthly payment so you can get back on your feet, etc. Banks usually don’t want the property back, they generally want to just collect the loan payments.
- If the bank isn’t willing to work with you very much… your best option may be to sell your house. Work with a local real estate house buyer service like Liberty House Buyer to sell your house fast for an all-cash offer. If you’re interested we can look at your situation and make you a fair offer on your house within 24 hours. Just fill out the form on our website over here >>
- Foreclosure. Last resort is to let the house fall into foreclosure. This is the worst possible scenario. It’ll harm your credit and you could still be left with money owed to the bank even after the foreclosure is finished. It usually best to take charge of the the situation to find a solutions rather than let the bank take the property.
By knowing your options, you may be able to avoid a significant impact on your credit score, allowing you to purchase a new home when your situation improves. A foreclosure on your credit report makes that possibility extremely difficult for 5-7 years, so if you have the opportunity, a short sale can be the better option.
Have a pending foreclosure? We’d like to make you a fair all-cash offer on your house. We have a lot of experience working with borrowers in default. If we aren’t able to help you directly, we would love to help by pointing you in the right direction.