How Foreclosures Differ From Short Sale Listings
When it comes to buying a home, there are various options available in the market. Two of the most common options are foreclosures and short sale listings. Both of these options provide a unique opportunity for potential homebuyers to purchase a property at a lower price. However, the processes and outcomes of these two options differ significantly. In this article, we will be discussing the differences between foreclosures and short sale listings in detail.
What are Foreclosures?
A foreclosure is a legal process in which a lender seizes a property from the borrower due to their failure to make mortgage payments. This usually happens when the borrower defaults on their mortgage and is unable to catch up on the missed payments. As a result, the lender takes possession of the property and attempts to sell it to recover the money owed. Foreclosures are typically initiated by the lender when the borrower misses more than three mortgage payments.
Steps Involved in a Foreclosure
Foreclosure is a lengthy process that may take several months to complete. The following are the typical steps involved in a foreclosure:
1. Missed Payments
The first step in the foreclosure process is when the borrower defaults on their mortgage payments. As mentioned earlier, this usually happens when the borrower misses more than three payments. However, the exact number of missed payments may vary depending on the lender’s policies and the terms of the mortgage agreement.
2. Notice of Default
After the borrower has missed their payments, the lender will send them a notice of default. This notice informs the borrower that they are in default and that they have a certain period to catch up on their payments to avoid foreclosure proceedings. This notice also includes the total amount that the borrower needs to pay to bring the mortgage current.
3. Foreclosure Proceedings
If the borrower fails to make the necessary payments or come to an agreement with the lender, the lender will initiate foreclosure proceedings. The foreclosure process varies from state to state, but it usually involves a public sale of the property. During this sale, the lender will try to recover the money owed by selling the property to the highest bidder.
4. Eviction
Once the foreclosure process is complete, the new owner of the property (usually the lender) has the right to evict the previous owner from the premises. This is typically done through the court system.
What are Short Sale Listings?
A short sale listing is a process in which the property owner sells their home for less than the amount owed on the mortgage. This option is available to homeowners who are facing financial difficulties and are unable to make their mortgage payments. Unlike foreclosure, where the lender takes possession of the property, the borrower has more control over the short sale process.
Steps Involved in a Short Sale
The following are the steps involved in a short sale:
1. Request for Approval
The first step in a short sale is for the homeowner to request approval from the lender. They need to provide proof of their financial hardship and demonstrate that a short sale is the only way to avoid foreclosure. The lender will review the request and decide whether to approve or deny it.
2. Listing the Property
Once the lender approves the request, the homeowner can put their property on the market for sale. They will work with a real estate agent to determine the appropriate listing price for the property. The sale price must be lower than the outstanding mortgage balance.
3. Finding a Buyer
The homeowner will have to find a potential buyer for the property. The buyer will need to submit an offer to purchase, which the lender will review. If the offer is accepted, the lender will begin the short sale process.
4. Completing the Sale
Once the lender approves the sale, the parties will proceed with the closing. The proceeds from the sale will be used to pay off the lender, and any remaining amount will be paid to the homeowner.
Key Differences Between Foreclosures and Short Sale Listings
There are several significant differences between foreclosures and short sale listings, including the following:
1. Owner’s Involvement
In a foreclosure, the lender takes possession of the property, and the previous owner has no involvement in the sale. However, in a short sale, the borrower has more control over the process as they initiate the sale and are actively involved in finding a buyer.
2. Impact on Credit Score
A foreclosure can significantly impact a borrower’s credit score and can stay on their credit report for up to seven years. In contrast, a short sale can also have a negative impact but is generally less severe and may stay on the credit report for up to four years.
3. Timeframe
Foreclosures are typically a lengthy process, and it may take months for the sale to be completed. On the other hand, short sales may also take some time, but the process is usually faster compared to a foreclosure.
In conclusion, foreclosures and short sale listings are two options available to homeowners who are unable to make their mortgage payments. While both options can offer a chance to purchase a property at a lower price, the processes and outcomes are significantly different. It is essential to understand these differences before deciding which option is best for you.
