The main difference between a short sale and a foreclosure is that in a short sale, the house is sold for less than what is still owed on the mortgage. In the case of stocks, it is the process of selling borrowed shares at a higher price and buying them back at a lower price, making a profit.
Key Takeaways
A short sale is when someone who owes money but can’t pay it back sells their mortgaged property to the people who hold the liens on the property.
Foreclosure is a formal process in which a lender takes ownership of a mortgaged property, kicks out the borrower or homeowner, and then sells the property when the borrower or homeowner can’t make full capital payments.
Most of the time, a default happens when the user or landlord stops making payments on the mortgage loan used to buy the property.
A short sale has some benefits over a default. If done right, the owner’s credit score might not be hurt as much.
Explaining a short sale vs. a foreclosure
Here are more details about how a buyer can choose between a short sale and a default. A short mortgage sale is when a borrower who is having trouble paying their mortgage sells a property for less than what is still owed on the mortgage. The lender then uses the money from the sale to pay off the mortgage. The lender will then accept less than full payment on the mortgage loan, and the borrower will no longer have to pay the mortgage. This is done to avoid bigger losses for the creditor or lender if the mortgage loan were to go into foreclosure.
Foreclosure, on the other hand, is the legal process by which a lender takes control of the mortgaged property, evicts the borrower or homeowner, and sells the mortgaged property when the borrower or homeowner can’t make all of the principal and interest payments on their mortgage loan, as stated in the mortgage deed or contract.
Most of the time, a default happens when the borrower or landlord falls behind on payments for the mortgage loan that was used to buy the mortgaged property. No borrower or homeowner wants to have their home taken away by the bank. Most of the time, a borrower or owner stops making payments on a home loan because of a sudden drop in their funds or a change in their situation. As you can see, there are a lot of parts to a smart default vs. short sale process.
Example
The following case will show how a short sale is different from default.
Let’s look at the case of Max, who got a $2 million home. He got a loan to pay for the buy, and after putting this property as a debt, the loan is worth $1.5 million. But after a few years, he can no longer make the loan payments. The bank starts a default process, in which the property is sold and the bank gets back the amount still owed on the loan.
Let’s use the same case to explain the difference between a short sale and a default. After paying the loan for a few years, Max is having trouble making ends meet. So, he goes to the bank and tells them that he wants to short-sell. The bank agrees, and Max sells the property for less than the amount of the loan. He then pays the loan back to the bank.
Short sales
Pros:
Less professional fees are needed for this method.
The user is in charge of starting the process.
It won’t show up on loan forms in the future.
The owner’s credit score doesn’t matter as much.
Cons:
There is a lot of papers to do.
It takes a long time.
The process also needs to be okayed by the lender, who may object or say no.
Since the process takes time, the buyer might miss a chance to get a better deal.
Foreclosure
Pros:
There is less paperwork to do.
Lenders are eager to sell the property that was taken back by the bank. So the sale can happen faster.
The buyers pay less for the land.
Cons:
More legal fees are needed for this process.
How the process gets started is up to the lender.
It must be mentioned on any future applications.
In most cases, a short sale has less of an effect on the credit score of the loan or owner than a default. But a short sale has some advantages that, if done right, may not hurt the owner’s credit score as much as a default would.
Foreclosure hurts people more than other bad things because it stays on their credit report for seven years. But because of this, the buyers won’t have to wait as long as they would have if they had gone through default to buy another house.
Questions Most Often Asked (FAQs)
Why are short sales better for banks than foreclosures?
The lender has to pay more money to go through the default process. In a short sale, on the other hand, the seller and the investor share the costs of selling the house quickly.
Are bank repossessions good for business?
During the default process, there are times when bankers make money. Even though this doesn’t always happen, it is possible for a provider to make enough money from interest payments and a sale to keep from losing money.
What risks are there with seized properties?
It’s worth it to pay more than the property’s current market value; buying a foreclosed home is often risky. If you buy something at an auction, this danger goes up because other people may “spite bid” to drive up the price.
