Foreclosure Verses A Short Sale
March 7th, 2010 Categories: Boulder Subdivisions and Neighborhoods, Buyer's Corner, Market Conditions, REO and HUD Talk, Selling Thoughts
A short sale is when the real estate sale proceeds fall short of the balanced owed on the property’s loan. This happens when the borrower is unable to pay their property’s mortgage. Instead of penalizing the mortgagor, the lender agrees to sell the property at a moderate loss. This is an advantage to both parties as it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. Clients in Boulder ask this all the time and no, this may not release the mortgagor from their deficiency. Neither foreclosure nor a short sale leaves you free and clear.
Definition made simple of foreclosure: when the borrower is legally removed as owner to their home. Ownership is terminated due to late payments (default). The property is sold at a public auction. Proceeds go to payment of the balance. When the bank buys the property at the auction, it is then put on the market.
If it’s right for your situation, a short sale would occur before the home goes to auction. A Realtor lists the home in hopes of selling and presenting an offer to the bank before the sale date. This date can be extended while the home is listed. Two basic scenarios: 1) Home receives an offer and the bank accepts = no foreclosure. 2) Property receives no offers or the bank rejects offers = home goes to auction & foreclosure.
CREDIT SCORE
Foreclosure: Can stay on your record for up to 10 years and drastically reduces your credit score 300 points! vs. Short Sale: Don’t plan on buying another home in Boulder County (without cash) for two years and the score is lowered about 50 points.
CREDIT HISTORY
Foreclosure: Recorded on public records. vs. Short Sale: Recorded by mortgage company as “paid”, “paid as negotiated”, “settled in full”.
CURRENT EMPLOYMENT
Foreclosure: Because it is on your credit report, it’s possible for employers to check the information and terminate employment as well. vs. Short Sale: Not on your report – no indication of loss – no employment termination.
FUTURE EMPLOYMENT
Same as above. Forclosures on your record are public information to future employers; like a DUI. They may use their discretion. vs. Short Sale: no record = employers can’t know.
Foreclosure: the bank has the right to pursue the deficiency of the loan. vs. Short Sale: It is possible to negotiate with the lender to give up the right to pursue the deficiency.
DEFICIENCY AMOUNT
Foreclosure: If the home does not sale at auction, it will go through the REO bank system. This results in a prolonged sale process, resulting in possible larger deficiencies. vs. Short Sale: Because they can be sold at near market value, the deficiency could be forgiven.
