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Foreclosure or Short Sale : What's the Difference?
Watching the value of your home plummet to below what you owe on the mortgage can be painful, as well as financially devastating. Lose that home to foreclosure and your credit will take a brutal hit that will last for seven years, yet trying to save it can lead to disaster in other areas of your finances.
One option available to struggling homeowners to keep the financial damage to a minimum is the short sale. A short sale has a different meaning in real estate than in the stock market, wherein an investor attempts to gain from a stock's drop in price. A short sale in real estate is where the homeowner reaches an agreement with the lender to sell the house at a loss to ease the financial burden of ownership. While lenders usually try to avoid short sales, the government has taken measures to encourage lenders to be more open to the process.
In May, the Administration announced plans to expand the Making Homes Affordable program, offering mortgage holders up to a $1,000 incentive for each short sale completed plus up to $1,000 towards paying off the holders of second mortgage holders. The plan also allows for up to $1,500 to the homeowner to help with moving expenses.
Even though a short sale seems like the easiest way to avoid a foreclosure, it may not always be the most sensible action to take. Some states offer certain legal protection for those going through foreclosure.
Here are a few things to keep in mind should you decide to pursue a short sale.
Your credit score will take pretty much the same hit from a foreclosure or a short sale. Both are considered severe delinquencies. The damage done can vary on the state of your credit before the hit. If you has a relatively good score before the short sale or foreclosure, it can fall as much as 200 points. Those with a lower score because of late payments or bad marks in other areas on their credit report will take a lesser hit on their score. Even with proper maintenance, it will take a year or two for your score to begin to improve.
In some states you may have more protection from the mortgage company under a foreclosure than a short sale. California, Minnesota, and Alaska, for instance, prohibit deficiency judgments in foreclosures, which allow the mortgage holder to sue the borrower for the difference in what the home sells for and what they owe.
To agree to a short sale, lenders usually require the homeowner to sign an agreement to repay the difference between what they owe and what the house actually sells for. Sometimes a skilled attorney can get the clause removed and convince the mortgage company to refrain from seeking any further payments.
A foreclosure usually goes through a process that takes several months. Homeowners generally use this time to accumulate cash, as they are no longer making payments, to help with moving expenses or a deposit on a new place, and to get on with their lives after they move out of the foreclosed property. In states where the lender is not required to take a borrower to court to foreclose and the process is much quicker, the homeowner is granted a redemption period of as much as one year. During this time the homeowner can attempt to stop the foreclosure through legal means available in their state. Under a short sale, homeowners give up that opportunity.
Marin Real Estate Blog