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​​Karen Summers Realtor
​​​                             When Results Matter

The Colony Homes Specialist​

​​​951-333-8065
[email protected].com​​
FORECLOSURE VERSUS SHORT SALE
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FORECLOSURE VERSUS SHORT SALE




In summary, foreclosures are used when a homeowner has defaulted on their home loan payments.  The lender takes possession of the property, which was pledged as collateral for the loan.  After a property is foreclosed upon, the lender puts it up for sale and uses the proceeds to recover the mortgage balance.

A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs for both the creditor and borrower.  The negative impact on the borrower's credit score is typically smaller in a short sale than in a foreclosure, but a short sale usually involves a lot more paperwork for all parties.

If you are facing an economic hardship and you own a home, you may be wondering what to do with your property. When analyzing the benefits and differences between a short sale versus foreclosure, you must gauge the effects in relation to your taxes, your future and your credit score.


Short Sale

Short sales are usually initiated by the homeowner, often when the value of a home drops by 20% or more.  Before the process can begin, the lender that holds the mortgage must sign off on the decision to execute a short sale.

Additionally, the lender, typically a bank, needs documentation that explains why a short sale makes sense; after all, the lending institution could lose a lot of money in the process.

Short sales tend to be lengthy and paperwork-intensive transactions, sometimes taking up to a full year to process.  However, short sales are not as detrimental to a homeowner's credit rating as a foreclosure is.  

A short sale looks better to future lenders and creditors: It shows you took action before the bank had to repossess your home.  A homeowner who has gone through a short sale may even, with certain restrictions, be eligible to purchase another home immediately.

Foreclosure


A foreclosure is the act of the lender seizing the home after the borrower fails to make payments.  This is the last option for the lender, since the home is used as collateral on the note.  Unlike a short sale, foreclosures are initiated by lenders only.  The lender moves against delinquent borrowers to force the sale of a home, hoping to make good on its initial investment of the mortgage.  

Also, unlike most short sales, many foreclosures take place when the homeowner has abandoned the home.  If the occupants have not yet left, they are evicted by the lender in the foreclosure process.

Once the lender has access to the home, it orders its own appraisal and proceeds with trying to sell the home.  Foreclosures do not normally take as long to complete as a short sale, because the lender is concerned with liquidating the asset quickly.  Foreclosed homes may also be auctioned off at a "trustee sale," where buyers bid on homes in a public process.

Credit Rating Impact

Credit Score Impact
A foreclosure can cause a borrower's credit rating to fall by 200 to 400 points.  It remains on the borrower’s credit report for 7 years.  This can have a very negative impact on future borrowing and even job opportunities, in cases where a potential employer requires a background check before hiring.   Foreclosures also become a part of one's public record.

A short sale can cause a drop of 50 to 130 points in one's credit score, although major reductions are usually due to the borrower being in default of the loan.  Credit reports will state that a loan in a short sale was “settled,” “paid as agreed,” or “paid in less than full.”

Experienced Agents Are A Wise Choice For A Short Sale


Because of the complexity of this type of transaction, make sure your agent or realtor is experienced with short sales, is knowledgeable,  and is willing to work with you on one.  Certain real estate agents specialize in short sales, and may hold a Short Sales and Foreclosure Resource (SFR) certification, a designation offered by the National Association of Realtors.

Holders of this certification have received specialized training.  In addition, try to find out if the seller's listing agent is experienced with short sales.  Although the bank is ultimately in control, a listing agent who knows the ropes may be able to facilitate or expedite the transaction.

Most properties offered as short sales are listed by real estate agents, and this often represents the best place to start, especially if it's a realtor who specializes in them.

The Bottom Line


A short sale can benefit all the parties involved: Lenders avoid the lengthy and costly foreclosure process; borrowers keep foreclosures off their credit reports; and buyers may be able to purchase properties at reduced prices.  

However, a buyer shouldn't assume the property is a great deal just because it is a short sale. Do your own comparable market analysis.  Also, if you make it to escrow, don't skip a thorough home inspection.

If you’d like to list your property as a short sale, or as a buyer, you’d like to purchase a short sale or foreclosure property, then reach out to me.  I am certified in short sales and foreclosures, holding a Short Sales and Foreclosure Resource (SFR) certification, a designation offered by the National Association of Realtors.  

More importantly, I have experience in short sales and foreclosure properties, with great results.


Tags: short sale, foreclosure, credit report, home buying, home sales,



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