There are several differences between a short sale and a foreclosure. Homeowners who find they are having difficulty meeting their monthly mortgage payments should be careful to understand these differences before taking action. Discussing the options with their mortgage company, scheduling a meeting with a real estate consultant, and learning what potential taxable and credit report consequences may be, are all important facets to understand before making a decision. Let’s first look at the definition of these terms:
Short Sale – when a lender agrees to accept less than what a homeowner owes on a mortgage. In a short sale the home is listed by the owner and sold.
Foreclosure – when the homeowner stops making monthly mortgage payments and the bank takes legal action against the homeowner and the deed of the home returns to the lender. In a foreclosure, the deed is transferred to the bank in a legal action.
Now that we know the difference, let’s take a look at the specifics of the short sale and a foreclosure:
A short sale provides the home owner the opportunity to put the home on the market at or near market value even if more than the market value is owed on the property. When the home is offered for sale, it must be advertised and marketed with verbiage such as “short sale” and “all contracts must be approved by bank.” This informs potential buyers that the seller cannot accept any offer without approval from the mortgage holder. In some cases, the bank will wait until several offers have been received before making a decision as to which one, if any, to accept. The reason for this is so the bank can be sure to accept the highest offer, thereby receiving the most money back on their initial investment.
The reason a bank will even consider a short sale is because often they will retain more of the money owed them as opposed to going through a costly foreclosure. The foreclosure procedure is expensive for banks as they include attorney fees, court fees, realtor fees, and tax expenses. Often it is simply more cost effective for them to accept the short sale.
Homeowners who are considering either of these options should also consult a real estate professional, a tax specialist, and perhaps a tax attorney. There are real estate professionals who specialize in short sales. They can provide additional information, such as the current market value of the home, the potential for it to sell at a specific price, and how long it will take to receive an offer. They will also be able to manage the short sale transaction, assisting the homeowner with forms, communication and anything else required of the bank. In addition, a tax specialist or tax attorney will be able to provide advice on any potential taxable consequences the homeowner may be responsible for in either a short sale or a foreclosure.
When determining what is best for a particular situation, short sale vs foreclosure, consult the professionals, discuss options with the mortgage holder, and understand what it will take to be successful in either case.