Short Sales

Since a short sale generally costs the lender less than a foreclosure, it can be a viable way for a lender to minimize its losses. A short sale can also be the best option for a homeowners who are “upside down” on mortgages because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.

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. A real estate short sale is unlike a short sale in investing. An investing short sale is a transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal number of shares at some point in the future.

Short sales don’t always negate the remaining mortgage debt after a property is sold. This is because there are two parts to all mortgages. The first is the lien against the property that is used to secure the loan. The lien protects the lender in case a borrower can’t repay the loan. It gives the lending institution the right to sell the property for repayment. This part of the mortgage is waived in a short sale.

The second part of the mortgage is the promise to repay. Lenders can still enforce this portion either through a new note or the collection of the deficiency. Whatever happens, lenders must approve the short sale, which means borrowers are sometimes at their whim.

Short Sale vs. Foreclosure

Short sales and foreclosures are two financial options available to homeowners who are behind on their mortgage payments, who have a home that is underwater, or both. In both cases, the owner is forced to part with the home, but the timeline and consequences are different.

A foreclosure is the act of the lender seizing the home after the borrower fails to make payments. Foreclosure is the last option for the lender. Unlike a short sale, foreclosures are only initiated by lenders. The lender moves against the delinquent borrower 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 after the homeowner abandons the home. If the occupants are still in the home, they are evicted by the lender.

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

A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home immediately. Depending on the circumstances, homeowners who experience foreclosure can expect to wait two to seven years to purchase another home. A foreclosure is kept on a person’s credit report for seven years.

While a foreclosure essentially lets you walk away from your home—albeit with grave consequences for your financial future, such as having to declare bankruptcy and destroying your credit—completing a short sale is labor-intensive. However, the payoff for the extra work involved in a short sale may be worth it.