A short sale happens when a home is sold at a lower amount than what the homeowner owes on their mortgage. Short sales are typically initiated when the homeowner is being pressured into completing a home sale as quickly as possible.
An example of this would be if the homeowner has defaulted on their mortgage and is facing foreclosure. Although they would be selling their home without receiving any profit, a short sale could be a foreclosure alternative.
What is Foreclosure?
Foreclosure refers to the legal process in which a lender repossesses a mortgaged property from a borrower who has stopped making their payments. It is the forced sale of the property, with the proceeds of the sale going to the lender in order to recover what they are owed. In circumstances involving home foreclosure, the homeowner is evicted from the home so the lender may sell the property.
Short sales are often utilized as a foreclosure alternative as some lenders may be willing to accept the short sale proceeds, and cancel or forgive any remaining payments on the mortgage. The unpaid balance owed to the lender is known as a deficiency. As a foreclosure alternative, short sales also help the borrower avoid some of the extra costs associated with foreclosure.
What are Some Differences Between Short Sales and Foreclosures?
Homeowners are often provided with a choice between undergoing foreclosure, or conducting a short sale of the home. Short sales and foreclosures essentially accomplish the same goal: the sale of a property in order to recover missed mortgage payments. However, the two processes do have their differences. Some of these differences include:
- A short sale is conducted by the homeowner, whereas foreclosures are initiated by the lender;
- The homeowner is in control of the property and the short sell process until the sale is complete, while the lender is in control of the foreclosure process;
- Short sales generally result in better overall credit scores for the borrower than foreclosures;
- A short sale is conducted through the normal real estate market, whereas foreclosure sales are typically completed through an auction or a court ordered judicial sale; and
- Short sales may be difficult to obtain and may not always be available under state laws, with some approval processes taking up to three months.
Another main difference involves the previously mentioned deficiency. In some states, the lender may recover these unpaid amounts through a deficiency judgement, while other states maintain anti deficiency laws that prevent lenders from collecting more than what was initially put up as security for the home. Anti deficiency laws may effectively allow the borrower to walk away from a mortgage without needing to pay more, although this can have a dramatically negative effect on the borrower’s credit.
How Do I Know If a Short Sale or a Foreclosure are Right for Me?
Neither short sales or foreclosures are ideal financial situations for a borrower. In either case, a homeowner is losing their home and will be facing financial health ramifications. However, the general opinion is that short sales are better for the delinquent borrower than foreclosure proceedings. This is due to the fact that a short sale leaves some control to the homeowner, and can be conducted even if the homeowner has not yet defaulted on their mortgage.
A short sale is not possible in every circumstance. Additionally, it can sometimes be a high pressure transaction involving many different legal issues in a relatively short amount of time. The lender will need to obtain a best offer price analysis before a sale can be approved, and there are various tax implications for both the seller and the buyer. Such tax implications could affect your credit as well as the home’s title.
Foreclosure is often viewed as something that happens to a person and is less of an option. Proceedings tend to be a bit more straightforward because of this, especially when the proceedings are mandatory. Short sale lawsuits may arise over legal disputes during the short sale process, whereas a foreclosure avoids much of this issue.
Which process is right for you will rely heavily on the specifics of your circumstances, including how far behind you are on your payments and what your state laws are. Additionally, it is very important to acknowledge the fact that you may not have a say in what is right for you.
The lender or the state may make the choice for you. That is why it is important to contact your lender at the first sign of trouble, in order to attempt negotiations and potentially avoid a short sale or foreclosure
Do I Need an Attorney for a Short Sale or Foreclosure?
Hiring a skilled and knowledgeable foreclosure attorney can ease some of the burden of facing the short sale or foreclosure process. An experienced foreclosure attorney can assess your situation and present you with all available options, as well as ensure your rights no matter which process you go through. Finally, an attorney can represent you in court as needed.