Foreclosure Vs Short Sale: What To Know Before It's Too Late
If you have been missing payments and have fallen behind on your mortgage, you may be wondering what your options you have to avoid foreclosure. This article will compare a foreclosure vs a short sale, how they are different and what the ramifications are for the homeowner.
We will also cover the other options besides a short sale to avoid foreclosure.
What Is A Home Foreclosure?
A foreclosure is when your lender repossesses your home because you have defaulted on your loan. This usually happens after several missed mortgage payments, and the lender will initiate a legal proceeding called foreclosure.
The foreclosure process can take months or even years to complete, during which time you will be required to maintain the property and pay any outstanding taxes and insurance. Once the foreclosure is finalized, you will be evicted from the property and will no longer own it. The foreclosure will also stay on your credit report for up to seven years, making it difficult to buy another home or get new lines of credit.
What is A Short Sale?
A short sale is when you sell your home for less than the amount you owe on your mortgage. This is usually only an option if you are facing foreclosure, as most lenders will not agree to a short sale unless they are about to foreclose on the property.
Short sales take a lot of time, require patience and persistence, and can be complicated depending on the lender.
A short sale can damage your credit score, but not as much as a foreclosure. Additionally, a short sale will stay on your credit report for up to seven years.
What is the Downside Of A Shortsale?
The biggest downside of a short sale is that you will still owe the difference between what you owe on your mortgage and the amount the home sold for. This is called a deficiency judgment, and the lender can pursue you for this money through a lawsuit. Additionally, the IRS may treat the forgiven debt as income, so you may owe taxes on the forgiven debt.
Secondly, a short sale will still damage your credit. Many people think that because they are avoiding foreclosure by using a short sale, their credit won’t be damaged however, this is not the case.
Also, a short sale is very time-consuming. During this time, your payments are still due, you are still accruing late fees, and there is always the chance that the lender will reject the short sale proposal and move forward with foreclosure.
How Does A Short Sale Work?
A short sale occurs when the lender agrees to let you sell your home for less than what is owed on the mortgage. For example, if you owe $200,000 on your mortgage and your home is only worth $160,000, you may be able to do a short sale.
In order to get approved for a short sale, you will need to provide the lender with documentation that proves you have a hardship and are unable to make your payments. This could be due to job loss, medical bills, divorce, or any other financial hardship.
Typically, there have to be other factors at play beyond just a hardship. You have to demonstrate that the property is truly worth less than the mortgage amount. This is normally done by proving that the property is in need of significant repairs.
Once the lender approves the short sale, they will set a date for the closing. At closing, you will sign over the deed of the property.
Short Sale vs. Foreclosure and What's the Difference?
The main difference between a foreclosure and a short sale is that with a foreclosure, the lender takes back the property and sells it at auction. With a short sale, you sell the property and the lender agrees to accept less than what is owed on the mortgage.
A foreclosure will damage your credit more than a short sale and will stay on your credit report for up to seven years. A short sale will also damage your credit but not as much as a foreclosure, and it will stay on your credit report for up to seven years.
Another key difference is that with a foreclosure, you will still owe the deficiency judgment to the lender. With a short sale, you may still owe taxes on the forgiven portion of the loan.
Options For Avoiding Both Short Sale and Foreclosure
If you are facing foreclosure, there are a few options you can pursue to avoid having to do a short sale and possibly even some options to prevent a foreclosure at the last minute.
A loan modification is when the lender agrees to change the terms of your loan to make it more affordable. This could involve extending the term of the loan, reducing the interest rate, or changing the type of loan.
Filing for bankruptcy will stop the foreclosure process. There are two types of bankruptcies that can help if you are facing foreclosure: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy will eliminate most, if not all, of your debts. However, you may have to give up some of your assets, including your home.
Chapter 13 bankruptcy will allow you to keep your assets, but you will have to repay your debts over time. This repayment plan will last for three to five years. During this time, the foreclosure process will be put on hold.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is when you give the property back to the bank in exchange for them forgiving the debt. This option is often used as a last resort because it will still damage your credit.
Sell Your House to an Investor
Selling your house to an investor is a great option if you are facing foreclosure. An investor will buy your house as-is for cash, so you don’t have to worry about making any repairs. Plus, you can close on the sale in as little as seven days.
Selling Your House and Getting Cash From Capstone Homebuyers
Of all the options, selling your home to an investor is usually the best choice. This is because you will be able to sell your house quickly, without having to go through the months-long process of a short sale or foreclosure.
You also won’t have to worry about owing any money after the sale, as you would with a short sale, and you won’t have to deal with the damage to your credit that comes with foreclosure.
Additionally, when you sell your home to an investor like Capstone Homebuyers, you can get cash for your house. This can be helpful if you are facing other financial hardships in addition to your mortgage payments.
If you are facing foreclosure and aren’t sure of your options even if you recently inherited the house with back payments, give us a call to see how we can help!