What is a short sale?
A short sale happens when a homeowner owes more on the mortgage balance than the market value or sale price of the property at the point the owner wants to sell. For a short sale, the homeowner is essentially asking the mortgage lender (typically a bank) to accept a lesser amount than the total mortgage owed. For example, if the homeowner sells the house for $250,000, but the remaining mortgage loan balance is $300,000, the seller is essentially $50,000 “short” on paying the lender back. That’s a short sale.
If the lender accepts the short sale terms, the loan debt will be settled and the borrower released from any further liability.
Like other homes for sale, a short sale property will be listed by a real estate agent.
For the seller, one thing you’ll want to watch out for is a deficiency judgment. A deficiency judgment is where, after a short sale ends, the mortgage holder seeks to recover the “deficiency” (the money it lost in this home sale) through a court order placing a lien on the debtor for further money (so in this case, a mortgage lender acts as a lien holder). Some states outlaw this practice, but you should ask, just so you aren’t blindsided by it later.
What is a foreclosure?
Foreclosure is a legal process that happens when a homeowner (although “borrower” might be a more appropriate term from the perspective of the lender) is unable to make mortgage loan payments for a significant period of time.
After three to six months of missed mortgage payments, a lender will issue a Notice of Default with the County Recorder’s Office. This notice is to let the borrower know he is at risk of foreclosure—and when they foreclose, the current owner will be evicted.
After receiving the Notice of Default, borrowers can try to settle their loan debt with their lender either through a short sale or by paying the mortgage balance they owe. This period is called pre-foreclosure and can last anywhere from 30 to 120 days after receiving the Notice of Default.
If the debt is not recouped, lenders will step in and foreclose on the property. To foreclose, they’ll schedule a foreclosure auction to sell the house to a third party. Foreclosure auctions will be advertised in local newspapers and are typically held at either the property or the local courthouse.
If no one buys the home at auction, the lender becomes the owner and it’s considered a bank-owned or REO (real estate–owned) property.
Another option to avoid foreclosure is to do a deed in lieu of foreclosure. A deed in lieu of foreclosure is a transaction where a homeowner transfers title or ownership of the property to the lender in exchange for being released from their loan debt-free and clear.
How is a Short Sale Better Than a Foreclosure?
With a Short Sale, the lender agrees to allow you to sell the home for a price that is below the outstanding balance of the mortgage, but higher than what the bank might receive if it foreclosed and sold the property at auction. Your lender may agree to accept the proceeds of the short sale as payment in full.
Here are a few benefits for doing a short sale:
- You control the sale, not the lender.
- You won’t be branded with the “F” word, foreclosure.
- Even if your mortgage is current you can do a short sale.
- Your short sale will be handled like any other home sale.
- You can stay in your home while you sell.
**Please talk to your accountant and lender to discuss the impacts of a foreclosure or short sale, on your credit. **