Since the housing crash of 2009, high unemployment rates and decreasing property values have resulted in significantly more foreclosures and short sales. Even though foreclosures and short sales are both options that homeowners may consider if they are not able to manage their mortgage obligations, there are significant differences between both of these processes.
Function
Mortgage lenders use the foreclosure process to return a home after an owner has failed to make his obligations. In some cases, the lender must file a default notice in court in order to regain possession of their house and market it. In California and in various other countries, lenders may also have the legal right to foreclose on a house without submitting their claim in court. A short sale is an agreement between the lender and the homeowner to market the house for less than what is owed to the home. Mortgage lenders are often more willing to negotiate a short sale rather than pursuing a foreclosure once the homeowner can detect a qualified buyer to purchase the house.
Time Frame
The amount of months or weeks it can take to foreclose a property or complete a short sale fluctuates. However, foreclosure is a process than a sale. A foreclosure may take approximately 3 months to complete, based upon the homeowner’s circumstances, the lender and state legislation. If the property is in a non-judicial state such as California, then the foreclosure process may take up to two weeks to finish. It may only take a couple of months or weeks to have a short sale accepted by the lending company when the homeowner has met the requirements and received an acceptable offer from a qualified buyer.
Deficiency
Unlike the foreclosure process, homeowners are given an opportunity to make a deal with the lender by a sale. There is a deficiency amount, when a home is sold for less than what the homeowner owes. At a foreclosure, homeowners do not have the chance to negotiate the terms of the deficiency and has to rely upon state laws to maintain their lender out of filing a deficiency claim against them. In a short sale, homeowners may attempt to negotiate with their lender to get them waive their right to pursue a deficiency judgment against them. Homeowners can also negotiate with the lender to repay a smaller portion of the deficiency equilibrium within an unsecured loan.
Consequences
Aside from losing their homes, people must also look at the impact that a foreclosure may have on their own credit compared to a short sale. Both judicial and maxillofacial foreclosures have a negative impact on a homeowner’s credit rating, and the default may also stay on their credit report for up to seven years. This might become a more permanent issue if the lender files a deficiency judgment against them. Short sales have the same negative impact on credit scores, and are represented on credit reports as a failure to cover the complete amount of the loan. 1 consolation is that the process is often shorter than a foreclosure, and so homeowners may begin repairing their credit earlier.
Considerations
While the choice to allow a lender to foreclose on their home can be obtained to all struggling homeowners, the short-sale alternative is only available to qualified homeowners. Homeowners who meet the financial hardship conditions established by their lender are allowed to perform a short sale. Homeowners who’ve loans in addition to the main mortgage on their house,such as a home equity loan HEL or home equity credit line, are often not given the choice to perform a short sale.
