Short sale vs. Foreclosure

Monday, April 6th, 2009 at 4:51 pm

The motive for a short sale or a foreclosure is essentially the same. The homeowner can no longer afford the mortgage payments. A short sale is any sale that closes at a price below what it is owed. In order for this to occur the homeowner or a hired representative has to negotiate with the lender to accept a lesser price. The foreclosure process puts the property in the ownership of the lender. It then becomes part of the long list of REO (real estate owned) properties. The lender will eventually hold an auction and hope to find a buyer. To help understand how a short sale would differ from a foreclosure it may be helpful to point out that short sales can also be referred to as “pre-foreclosure sales” which precedes the home being officially repossessed or foreclosed on by the lenders. Lenders encourage short sales over foreclosures because they generally net more from them, since foreclosures incur additional marketing, legal, processing and carrying costs.

Whether facing a short sale or a foreclosure one’s credit could drop by as much as 200-300 points. However, short sales do carry less negative effects than foreclosures. Short sale sellers are often seen as less risky than foreclosed sellers. Case in point, Fannie Mae recently adjusted their guidelines to dictate only a two year waiting period for a short sale seller to buy another primary residence, while they extended the waiting period for foreclosures to five years. It should be noted that there are still negative ramifications for short sales, even if less damaging than those associated with foreclosures and/or bankruptcy. The bank is more willing to do a short sale because the alternative, foreclosure, is usually much more expensive.

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