Foreclosure vs. short sale: What’s the difference?
While selling a home as a short sale is hardly ideal, many experts argue it’s smarter than pursuing more drastic measures like foreclosure. Foreclosure is when a homeowner falls so behind on the mortgage payments, the lender repossesses the house, often against the homeowner’s will, then tries to sell it. If the amount the mortgage company receives from the sale is less than the mortgage debt owed, depending on state laws, the homeowner may have a deficiency judgment. In other words, the now-former homeowner may still owe money on the home loan. Foreclosures are less common than short sales. Even during economic downturns like the housing crisis of 2011, the rates rose up to only 3.6%. People often confuse foreclosures with short sales, and while they share some similarities in that both typically happen to homeowners in distress, the process and consequences are very different. For one, the foreclosure process typically happens very quickly, since lenders are eager to recoup the costs incurred by the unpaid mortgage. Foreclosure also negatively affects an individual’s credit score and credit report. As a result, individuals who undergo it typically have to wait at least five years before they can qualify for a new home loan. Bottom line: Foreclosure is scary for good reason. People facing it will want to approach their lender and discuss their options—one of which might be to do a short sale instead.
What Is a Short Sale?
When you owe more on your home than it’s worth and you need to sell, the transaction in which you will sell your property is called a short sale. You need your lender’s approval to do a short sale because they’ll be accepting less than they’re owed at closing. There are many reasons homeowners opt for a short sale, but one of the most common is to avoid going into foreclosure. If you’re a buyer, a short sale can enable you to buy a property at a discount because the seller is distressed and has fewer options. But you’ll need to be patient because buying a property in a short sale may take some time. Let’s review more details about how short sales work for sellers and buyers. How Do Short Sales Work for Sellers? Short sales are an option for homeowners who are underwater on their mortgage to sell their property, and to avoid going into foreclosure. For many distressed homeowners, short sales are an alternative to foreclosure. Here are the steps sellers need to take in order to sell their properties in short sales: Provide proof of hardship: When you owe more than your home will sell for, you can’t just list your home to start. You first need to provide proof of hardship to your lender. The two most accepted hardship cases are proof that lower income has made your home unaffordable, or that you’re subject to a mandatory job relocation. When reviewing your hardship case, your lender will analyze your income and assets. If your debt-to-income ratio has risen, it will help your short sale approval. If you have money saved, they’ll require that you contribute these funds to minimize their loan payoff loss. You will also need to provide a market analysis as well as indicate any liens on your property. List your property: Once the lender has approved the short sale, you can list your property with a real estate agent. You’ll need to present any offers to the lender for approval. This process can take two weeks to several months. If you have a second mortgage, both lenders must approve each other’s terms, making the process longer. Lenders approve the sale of the property: The lenders will review the buyer’s offer and decide if they will approve the sale. Once approved by the lenders, the short sale can close as soon as the buyer can get their loan approved, funded and closed. What Happens After Closing for the Seller Typically, your credit score will drop by 75 to 200 points after selling your property in a short sale, which is less severe than a foreclosure. (Experts estimate that a foreclosure will lead to a dip in your credit score of about 200 or 300 points). Lenders often won’t consider a short sale approval for your property until you’re two to three months behind on your payments. This means your credit score drop will be at the higher end of the range if this is the case. The rest of the drop will depend on whether the lender reports the short sale as “settled” debt or “paid” debt. You should try to negotiate for the latter, but the former is more common, and hits your credit score harder. The short sale will stay on your credit report for seven years, but you can finance a new home purchase within one to four years of a short sale depending on credit score, loan type and down payment. Again, a foreclosure is even more severe. With a foreclosure, that time ranges from three to seven years. Ask your lender to advise on options. Prior to the housing crisis, the lender’s loss was taxed as income for the seller, but now short sellers have no tax liability.
'It's gonna be an interesting spring': Buyers, Sellers Seize on Hot Market
Buyers are navigating a stable housing market and making well-informed offers while sellers are leaning into a low-inventory environment, according to new data and agents who spoke to Inman Like Staten Island Chuck, the groundhog who earlier this month predicted an early spring after failing to see his shadow, real estate agents nationwide are seeing indications that the homebuying season is off to an early start. U.S. home sales are inching up and price cuts are dwindling as buyers get an early jump on the busiest — and, apparently, most competitive — season of the year, according to data from Zillow and agents who spoke to Inman. “Our market is doing extremely well,” Jeffrey Decatur, an agent with RE/MAX Capital in Albany, New York, told Inman, adding that a home he listed on Monday has since been toured, in-person, by more than 40 prospective buyers. “What I’ve been telling my clients is that real estate is super hyper-local. It could be good on one block and not good on another block.” Newly pending listings in January fell 20 percent from levels a year earlier, and remained at roughly the same level as in January 2020, according to data issued by Zillow. That’s compared to November, when mortgage rates hit a peak and newly pending listings were down 38 percent year over year. Home values slipped just 0.1 percent from December to January of 2023, reaching a typical value of $329,542, 6.2 percent higher than the levels seen in January 2022. Some buyers are taking advantage of the less frenzied market to make a well-informed offer, while sellers are able to take advantage of low inventory environment, according to the report. “Now as a buyer, you can slow down, have your inspection and make a strong, well-informed offer,” Ryan Platzke, a Realtor at Helgeson/Platzke Real Estate Group in Minneapolis, said in a statement. “And as a seller you are still in a very good position,” Platzke added. “You won’t see the 10 offers all cash, non-contingent, etc. But you will see one, maybe three offers, usually that first or second weekend, where you’ll be able to select which one to go forward with and comfortably make a decision.” While homebuyers are slowly returning to the market, sellers have been more reluctant to get off the bench. A paltry 230,000 new listings came online in January, according to Zillow, the lowest number since the search portal giant began tracking the metric in 2018, and 30 percent below a 2018–2021 average of about 330,000, data shows. Mortgage rates hikes throughout 2022 put pressure on sellers to avoid listing their homes unless transacting was unavoidable. “People are finally starting to embrace that we are maybe in some recessionary times and are tightening up their spending habits a little bit,” Nick Painz, an agent for RE/MAX Alliance in the Denver area, told Inman. “The only people that are moving are people that have to move: Job creation, marriage, divorce, death.”Painz said he expects a competitive spring buying season with mortgage rates now hovering around 6 percent and inventory expected to stay low. “The same people that saw that they missed their opportunity at 3 and 4 percent the prior spring, they saw the rates pull back and went ‘we’re not going to miss it this time,'” he said. “It’s going to be an interesting spring market.”
Categories
Recent Posts
