Short Sale vs. Foreclosure: Explaining the Processes and Effects

When you are having trouble making your mortgage payments and foreclosure is looming, it’s good to seek solutions. You might be considering a short sale to settle your debts. But is that truly the best option? First, you should understand the difference between a short sale and foreclosure, and the impact both can have on your finances and credit score.

And that’s what this article will do. We will compare a short sale vs. foreclosure, explain how they work, and the repercussions of both. In the end, we will also give you another option that can avoid both foreclosure and a short sale. When you are done, you should know enough to be able to make an informed decision. So let’s get to it.

What Is a Foreclosure / What Is a Short Sale?

Foreclosure and a short sale may seem similar, but they are two completely different processes. In short:

• A foreclosure is a legal process that happens when a borrower cannot make mortgage payments so the lender seizes the property and puts it up for auction.
• A short sale is when the lender allows the borrower to sell the property for less than the outstanding mortgage balance.

It is clearer with an example. Let’s say you took out a $400,000 mortgage loan to buy a house. You paid off $100,000, but the economy has deteriorated and you are no longer able to make your monthly installments. The housing market has also crashed, so your $400k house is now underwater and worth $250k.

One thing that can happen is that the bank seizes your house – that’s foreclosure. Foreclosure doesn’t happen in an instant and we’ll explain later how it works, but that’s the end result. You are no longer the owner, your credit score is shot, and the bank will put your house up for auction.

A short sale, on the other hand, is when you are the one selling the house. You know you can’t make your mortgage payments so to avoid foreclosure you decide to sell your house. However, your remaining mortgage balance is $300,000, while the value of the house is now $250,000.

You ask permission from the lender to sell your house for $250,000. The bank approves, but after the house is sold, the bank is short for the difference between the outstanding mortgage and the selling price ($50,000 in our example) – thus the name short sale.

You’ve now settled your mortgage loan, but because a short-sale home is sold for less than the outstanding debt, it will also show as a negative mark on your credit report.

How Foreclosures Work

The exact foreclosure process varies by state, but it always follows the same pattern. It starts with you missing to make mortgage payments. Usually, if you miss one payment, the bank will send a missed-payment notice. If you miss another one, the bank will likely send a demand letter.

Then, after 90 days of missed payments, the bank will file a notice of default with the county where your property is – this starts the official foreclosure process. Even after the notice of default is filed, you can still avoid foreclosure by bringing the loan current or negotiating with your lender (such as negotiating a payment plan, modifying your loan, or getting reinstatement and forbearance).

If none of these options help and you still can’t make your payments, your house will ultimately be foreclosed and sold at auction.

Pre-Foreclosure vs. Foreclosure

Pre-foreclosure starts when the notice of default is filed. It is the process before your home is foreclosed or before foreclosure proceedings start before a court (depending on whether your state applies non-judicial or judicial foreclosure, respectively).

During pre-foreclosure, you still have the option to make a deal with your lender and avoid foreclosure. This distinction between pre-foreclosure and foreclosure is important in this short sale vs. foreclosure article, as most short sales happen during pre-foreclosure.

How Long Does a Foreclosure Stay on Your Credit Report?

A foreclosure stays on your credit report for 7 years after the first delinquent payment. By law, a foreclosure must be removed after 7 years. However, the negative impact can gradually diminish before the 7 years are out.

Can You Sell a House in Foreclosure?

You can’t sell your house if it is foreclosed on, i.e. the bank has taken ownership of it. However, you can sell it during the pre-foreclosure process. This brings us to short sales.

How Short Sales Work

During pre-foreclosure, if you know that you won’t be able to make your loan current or find another option to settle it, you can ask your bank to allow you to do a short sale. You ask the bank to sell the property for less than the amount of the outstanding mortgage.

If the bank approves and you manage to sell the house, your debt is settled and you avoid foreclosure. As far as the selling process itself goes, short sales work much like regular sales - you can hire a real estate agent or do it on your own.

But There’s Another Problem – Deficiency Judgments

Sometimes, even after a short sale, the lender may ask the court to allow them to collect the difference between the outstanding debt and the sale price. So, if your debt is $300,000 and you sold the house for $250,000, the bank may seek a court judgment to collect the remaining $50,000.

If the deficiency judgment is approved, the money is collected through regular means – such as levying your account or garnishing your wages. However, lenders don’t always seek deficiency judgments and they are even prohibited by law in some states. Additionally, you can fight a deficiency judgment in court or, at worst, declare bankruptcy.

How Long Does a Short Sale Stay on Your Credit Report?

A short sale stays on your credit report for 7 years. However, when discussing short sale vs. foreclosure, it should be noted that a short sale has a lesser negative impact on your credit score than a completed foreclosure.

Foreclosure vs. Short Sale – the Short of It

• Foreclosure is when your lender seizes your property due to unpaid mortgage installments and sells it off at auction.
• A short sale is when you sell your property for less than your outstanding mortgage balance.
• Your lender may submit a motion to a court for a deficiency judgment to recover the leftover amount.
• Both foreclosures and a short sales stay on your credit report for 7 years.
• A short sale has a lesser negative impact on your credit score.

Don’t Let Your House Go into Foreclosure or Accept Short Sale Offers

When your lender files a notice of default, it is a public document. Wholesalers and flippers look for these kinds of opportunities, hoping to take advantage of your precarious position. They assume you are desperate and will try to low-ball and pressure you to make a sale.

But you don’t need to accept any short sale offers. Contact SleeveUp Homes to sell your house for top dollar. We buy underwater and distressed properties as-is for cash in Southern California and restore them. We guarantee you can get at least $10,000 more than any other offer you’ve received.

SleeveUp Homes was founded precisely to help people like you. We grew tired of homeowners getting taken advantage of and realized we could provide them with a better option. You won’t be dealing with any realtors, so you won’t be paying a commission and we’ll take care of the closing costs.

But don’t take us at our word – request a cash offer and see what you can get, no strings attached. If you find our offer suitable, you can close in as little as 7 days.

Author:

Cesar Gomez , Broker /

Cesar has worked as a real estate agent and broker in the southern California region since 2013.

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