No homeowners want to experience the financial burden of losing their property. As a precaution, homeowners should know the differences between foreclosures and short sales in case they face either hardship.
First, it is important to note their similarities. Foreclosures and short sales occur when homeowners fall behind on their mortgage payments. Under both circumstances, the owners can no longer occupy them, so the homes typically go on the market with low listing prices. These similarities might prompt people to use the terms "foreclosure" and "short sale" interchangeably. However, these two options have far more differences than resemblances.
What is a foreclosure?
When homeowners face foreclosure, they can't pay their mortgages for an extended period of time. Thirty days after the missed payment, the lender will send an initial nonpayment to remind the homeowner to pay. If the homeowner continues to forgo payment, the lender will send an official notice of default, which warns of the risk of foreclosure. At this point, homeowners can settle their debt by paying what is owed or going forward with a short sale. If they do not take one of these routes, their lender will initiate the foreclosure process. This usually starts between three to six months after the first missed mortgage payment, as reported by the U.S. Department of Housing and Urban Development.
Once this process begins, the lender will schedule a foreclosure auction. This event might take place at the property or at a courthouse. Buyers must pay for the foreclosure with cash, sometimes without seeing the property or having a home inspection beforehand. They run the risk of buying a home with mold or foundation issues, which they will need to pay for on their own dime. For someone looking for a fixer-upper, a foreclosure can be a great investment. Sometimes, buyers are lucky enough to get a foreclosed property in perfect condition.
A foreclosure can harm a homeowner's future creditworthiness and ability to secure a mortgage. Zillow reported that a credit score can drop 200 to 400 points after a foreclosure. Affected individuals may have trouble buying new property because a foreclosure stays on a credit report for seven years. They may have to wait at least five years before buying a new house.
What is a short sale?
In a short sale, the homeowners owe more on their mortgages than their properties are worth. They can ask their lenders to lower their payments. If the lender approves, homeowners have settled their debts and are not liable for their homes once the short sale is in effect. People experiencing short sales typically do not face significant impacts to their credit scores and can buy a new house almost immediately.
Typically, short sales take between 90 and 120 days, according to Realtor.com. This procedure takes longer than the foreclosure process because the lender needs to negotiate some costs with the seller and the homebuyer. While most sellers pay for repairs, closing costs and wire transfers during a traditional sale, the lender takes on this responsibility during a short sale or may convince the buyer to cover these costs.
Unlike people buying foreclosed properties, short sale buyers can have a home inspection to make sure the dwelling is in good condition before closing the deal. They can also take out a mortgage on a short sale, though lenders typically give priority to cash buyers.
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