Short Sales and Foreclosures

You hear a lot about short sales and foreclosures these days, but there are some significant differences between the two.

A foreclosure is a process whereby the lender takes possession of a property when the borrower is in arrears with their mortgage payments. The process is regulated by each state and can take up to a year or more. During this period the home owner has the opportunity to get current by paying all back payments and interest and can remain in the property.

A short sale requires the sale of the property and only happens when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell and pay all costs of the sale.

You can't just wake up one morning and decide you're going to sell your home at a loss by asking for a short sale. It used to be that lenders wouldn't even consider a short sale if your payments were current, but in these tough economic times, that has changed. However, lenders will be more agreeable to a short sale if your payments are in arrears. Short selling does not relieve the obligation to pay the full amount owed. If you have cash assets, the lender can legally go after those to make up the difference.

Doing a short sale is not for the faint of heart. All are at the lender's mercy and working with them requires patience, diligence and a lot of knowledge. It is important that the buyer has a full understanding of the process.

There's no major credit score advantage for short sale over a foreclosure. The only advantage is being able to buy another home within two years with a short sale, over the three- to five-year period required for foreclosures. When considering either method, it is essential that you seek legal advice prior to entering into the process.