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Foreclosure vs. Short Sale: What's the Difference?
The terms "foreclosure" and "short sale" often go hand-in-hand. Though these processes have some similarities, they are different outcomes for both the homeowner and the lender. They also mean other things to potential buyers.
A foreclosure occurs when the lender seizes the property from the owner and puts it up for sale. In this case, the bank is the owner and seller of the property. With a short sale, the homeowner opts to sell the property for less than what's currently owed on the mortgage, with the lender's approval.
Let's look at some of the differences between these two options.
What's a Foreclosure?
The lender may start the foreclosure process if the homeowner (also referred to as the "borrower") falls behind on payments for a significant time - usually at least three months or more. The bank will officially notify the borrower, through the courts, that they are at risk of foreclosure and eviction.
If the borrower and lender don't come to a payment agreement or decide to do a short sale, the lender may move to foreclose. The bank will put the home up for sale at auction, and if no one purchases it, the property will be owned by the bank until it's sold.
What's a Short Sale?
A short sale is something homeowners may opt for to prevent foreclosure. Any time a property is sold for less than what's owed on the mortgage, it's a short sale. It usually requires the homeowner to be facing some hardship.
The lender usually agrees to settle the remaining debt once the property has been sold, relieving the homeowner of the burden. However, sometimes the lender will seek to recover the loss from the original borrower.
The terms of the sale, including the price, must be approved by the lender. The lender is looking to minimize their loss, so short sale deals are usually "as-is," The buyer is responsible for any repairs, fees, and closing costs.
Foreclosure or Short Sale: Which is Right for You?
Sometimes it's possible to find a great deal by purchasing a home that's in foreclosure or a short sale. However, there are advantages and disadvantages to each option.
Purchasing a home out of foreclosure typically takes less time because the lender is motivated to stop the loss and recover their funds. A short sale can take many months or even a year to close. You'll also have to make sure that your lender will approve the purchase of a short sale.
A short sale purchase isn't ideal if you're a first-time buyer. It's a lot of extra paperwork and headaches, and you won't get the same seller considerations that you typically would get with a traditional purchase. Find out what a short sale means for the buyer?
You typically can't purchase a foreclosure with a traditional mortgage loan, so this is only an option for buyers who have enough cash up-front.
Foreclosures and short sales are ways to purchase properties from lenders who may be motivated to move the property rather than take a loss.
Short sales and foreclosures can be risky because they're usually sold "as-is" and sometimes purchased unseen, which isn't something that all buyers are willing to do. However, if you can make the process work, it can pay off. The best thing to do is consult an experienced agent to help guide you through the process.