In our previous guide on short sales, we discussed at length, what a short sale was, and the basics of the process. Based on the feedback we received, we heard a lot of people asking for additional information on the difference and pros/cons of short sales vs. a foreclosure.
Before we get to the meat and potatoes of this guide, I want to tell you a short story we saw back in 2013 of a homeowner who had this very option (to be a bit proactive and either short sell, make up payments or, what ultimately happened – go through foreclosure).
Let’s call this person “Mary.” Mary had gone through some hard times with a recent divorce, and some changes at work – and was struggling to make mortgage payments. However, by the time we heard of the scenario things were looking up – income had returned, albeit not to where it was in the beginning (still making things difficult to afford). However, Mary had gotten used to the extra padding in her monthly budget from not having to pay her mortgage and other bundled expenses. After going more than 2 years this way, a deadline was fast approaching on negotiating with her lender on a new payment schedule, a short sale, or foreclosure. Mary ultimately decided not to do anything and wait for the foreclosure judgement and eviction notice to come down. Which it did – but because of a mix up in communication, she had less than 36 hours to move all of her stuff (2500 sqft) and and her kids into a new home. Because of the extreme deadline they ended up being effectively homeless for a couple days. Additionally, because of the hit to her credit – issues arose at her business where she wasn’t able to qualify for the same programs with vendors she had before, and she was unable to purchase another home when she wanted/needed.
So long story short, it pays to be proactive, and as difficult as it may be (negotiating with banks) it can pay off and avoid decades of problems and save tens of thousands of dollars (or more) down the road. With that said, what is the difference between a short sale and foreclosure.
The Difference Between a Short Sale & Foreclosure
In a foreclosure, the lender seizes the home after the borrower fails to make a certain number of payments. Unlike most short sales, foreclosures may take place after the homeowner has abandoned the home. If the homeowners haven’t left, they are evicted by the bank during the foreclosure.
Foreclosures don’t generally take as long as a short sale because banks try to liquidate the asset (the home) quickly. Foreclosed homes may also be auctioned off at a “trustee sale,” where buyers bid on homes in a public process.
Homeowners who undergo foreclosure experience an immediate drop and precipitous drop in their credit ratings. In most circumstances, they must wait a minimum of five years to purchase another home or three years with an FHA loan. The foreclosure appears on a credit report for seven years.
With short sale, no such deleterious effects are applied to one’s credit score.