When it comes to home ownership there are a number of issues that you can come up against. In regards to those that are having trouble paying off mortgages or meeting monthly bills, there are two options that lenders offer. The first is a short sale and the second is a foreclosure. They are both different but do have some similarities. There is no shame in not being able to pay for your home as circumstances frequently change and are not in our control. Knowing the difference between a short sale and a foreclosure can help you determine which avenue is right for your specific and individual case.
What is a Short Sale?
For starters, most people tend to choose short sale over foreclosure but both have benefits and drawbacks. A short sale in simple terms is allowing a property to sell for less than the amount that is owed on it. This means selling your home for the appraised value and the value that is approved by the market rather than trying to get the amount that you still owe on it. A good example of this is; if you have several mortgages out against your home and you need to sell.
You would list the home for the appropriate amount and allow the sale to go through knowing that the amount of money you make from the sale is not going to meet the amount that you owe. Say you owe $224,000 but the home is only worth $175,000 in the current market. In a short sale situation, you would allow the home to sell for $175,000 then assume responsibility for the remainder of the price. This means it can be rolled over to a private loan and you generally have a period of time in which you must pay the loan off and a period of time you must wait before you can get another mortgage.
What is a Foreclosure?
A foreclosure is a bit different but the bank does still lose money in the process. With a foreclosure, the mortgager allows the lender to take over the property and allows the lender to be responsible for selling the property in order to get back the money they have invested. This means that even if the home is only worth $100,000 and you owe $150,000, the bank is only going to get what it can from the sale of the home and you are no longer liable for any part of the loan or the associated mortgage with the property.
The process of foreclosure takes a few months and generally a mortgager needs to be five or six payments behind on it’s mortgage before the bank will start the foreclosure process. There are of course repercussions for the mortgager, if a property is foreclosed on while they are paying. The main issue that is going to be is the hit that your credit score takes and the possible inability to take out another mortgage after you have your other mortgage foreclosed on.
Which Option Should You Choose?
Both are incredibly different and both have different benefits and drawbacks. If you have the time and the effort to allow for a short sale, this is going to be the best option if you do not want a foreclosure to show up on your credit report and to potentially affect your future mortgage options. Fannie Mae’s guidelines for 2016 allow someone that has a short sale, a total of four years to reapply for a mortgage after a short sale. For those that have filed a short sale under extenuating circumstances you only have to wait two years before you can get another mortgage.
Short sales are going to be more hassle and more work on the seller than a foreclosure but they also might make it a bit easier to stomach what you are having to do. Instead of having to deal with the stigma that comes from a foreclosure, a short sale is closer to just selling your home as you normally would when you are ready to move. With either option, you are going to have to rent for a period before you can get another mortgage.
For those that simply cannot wait for a short sale or do not have the ability to pay the remainder of the loan or simply do not want to worry about the sale of their home, a foreclosure is going to be the best bet. You should take the time to really think about any option and often a financial adviser can help you determine how you are going to go about your foreclosure or your potential short sale.
Taking the time to think about your options is going to be your best bet. With a short sale you assume more responsibility and you are required to sell the home. If you have some place else to live lined up, this might be a great option. For those that want to wash their hands of the home, a foreclosure is going to be the best bet. Take the time to talk with an adviser to find out what is going to be right for you.