Short Sale vs. Foreclosure – What’s the Difference?

Whether you’re a buyer or a borrower / seller, a short sale and foreclosure each present different advantages and difficulties. We break down what you need to know in each case.

What Is A Foreclosure?

According to Redfin, “A foreclosed home is one in which the owner is unable to make his mortgage loan payments and the bank repossessed the home.”  If you stop making your house payments… your lender has the right to foreclose on your property so they can attempt to recoup their money that was lent to you.

 

A home is typically foreclosed on when a borrower fails to make mortgage payments. The lending institution assumes ownership and possession of the property, evicting the borrower. These properties are then sold at auction or more traditional means utilizing the service of real estate agents. A foreclosure can damage the credit rating of a borrower, and make it very difficult to obtain a mortgage for many years.

 

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 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” (source: Wikipedia).

 

In a short sale, the home is sold for less than the outstanding balance of the mortgage. The unpaid balance (known as the deficiency) may or may not still be owed by the borrower.

 

This option typically takes some time, as a few different lending institutions may own the mortgage. Each lender has different procedures as well. 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. Lenders do not typically approve a short sale unless the homeowner is experiencing some financial distress.

 

Short Sale vs. Foreclosure – Your Options

The main difference between the two is whether or not the home has equity. A foreclosure can happen no matter what the mortgage balance is (compared to the home’s value), a short sale happens when the lender cannot recuperate their funds from a normal sale.

 

While both options can have ramifications, a short sale often has less of an impact on the borrowers creditworthiness.

 

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 again sooner.

 

Choosing between foreclosure and a short sale (or a 3rd option…  selling your house fast ) is an easy choice for a borrower having trouble paying a 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.

 

  1. Talk with your lender and discuss ways that they can work with you on your loan. We offer free consultation 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.
  2. Attempt a short sale or other modification program 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.
  3. 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 Skye Homes 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 below.
  4. 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. We highly advise to NOT sit around and let the bank take your home.

By knowing your options, you may be able to dodge a significant impact to 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.

 

Give us a call anytime at or
fill out the form on this website today! >>

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Jake Knight

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Jake Knight

Jake Knight has been a residential real estate investor since 2016. He specializes in acquiring and renovating houses in the Bay Area, Sacramento, eventually expanding to over 15+ states. Jake’s prior experience in lending, going back to 2003, laid the foundation for solving complex real estate issues.

Drawing upon his background in assisting sellers with the task of transitioning from a home they have lived in for decades, Jake launched a “senior move management” business in 2021. This company provides valuable support to seniors during the process of packing, coordinating their moves, and downsizing as they transition into senior living communities.

In 2022, Jake expanded his services by becoming a licensed real estate agent in California, providing comprehensive solutions to his seller clients.

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On the other hand, there are some sellers who need a custom solution due to either the property’s condition or the seller’s personal situation, or a combination of the two.

When the property is in really bad shape, they’re likely going to sell to an investor, so it may make sense to save money on commissions and find their own investor.

Some examples of personal situations that we can help with are: hoarding, pre-foreclosure or other financial issues that require a fast home sale, house with non-paying tenants or squatters, severely delinquent property taxes, homeowners who want to rent back the home longer than normal, or sellers who value privacy and/or are embarrassed by their home.

If your seller lead meets these criteria, you should propose the idea of making an introduction to me. You can simply suggest to them that your partner or colleague buys houses and ask if they are interested in speaking with me. Remember, you are not performing real estate agent duties. See our disclaimer below. The main thing to keep in mind at this point is to qualify them as a good fit or not. I can help you with the documentation and process things.