What is the Difference Between Short Sale and Foreclosure?
🆚 Go to Comparative Table 🆚The main difference between a short sale and a foreclosure lies in the voluntary nature of the transaction and the impact on the homeowner's credit. Here are the key differences:
Short Sale:
- Voluntary action by the homeowner, requiring approval from the lender.
- Occurs when a mortgage lender allows the homeowner to sell the property for less than the amount owed on the mortgage.
- Typically takes longer to close, up to one year.
- Less damaging to the homeowner's credit score compared to a foreclosure.
- Homeowners may be eligible to purchase another home relatively soon after a short sale, with certain restrictions.
- Short-sale homes are usually in better condition than foreclosed homes.
Foreclosure:
- Involuntary action initiated by the lender.
- Lender takes legal action to take control of and sell the property.
- Occurs more quickly than a short sale, often within months.
- More damaging to the homeowner's credit score than a short sale.
- Homeowners who experience foreclosure generally need to wait longer before purchasing another home.
- Foreclosed homes are often in poorer condition than short-sale homes.
For buyers, either option can result in a good deal on a home, but short sales are generally more attractive due to better property condition and less negative impact on the homeowner's credit. However, the choice between a short sale and a foreclosure depends on the homeowner's current financial circumstances.
Comparative Table: Short Sale vs Foreclosure
Here is a table comparing the differences between a short sale and a foreclosure:
Factor | Short Sale | Foreclosure |
---|---|---|
Definition | A voluntary process where a homeowner sells their property for less than the amount owed on the mortgage. | An involuntary legal process where a lender repossesses a mortgaged property and sells it to recover the debt. |
Credit Impact | A short sale can have a credit impact ranging from 50 to 150 points. | A foreclosure remains on a person's credit report for seven years. |
Timing | A short sale can take up to one year to close. | Foreclosures generally move along much faster. |
Future Home Purchase | Homeowners who go through a short sale may be eligible to purchase another home immediately in some circumstances or within 2 years. | Homeowners who lose their property to foreclosure are not eligible to purchase another home for 5 years. |
Deficiency Rights | During short sale negotiations, the lender may waive the right to pursue the homeowner for a deficiency. | In some states, lenders can pursue the homeowner for the remaining debt after foreclosure. |
In summary, a short sale is a voluntary process where a homeowner sells their property for less than the mortgage balance, typically due to financial distress. In contrast, a foreclosure is an involuntary legal process where a lender repossesses a mortgaged property and sells it to recover the debt. The credit impact, timing, and future home purchase options are generally more favorable for homeowners going through a short sale compared to a foreclosure.
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