Deciding to sell your home as a Short Sale or Foreclosure is an important consideration that most sellers never think about discussing with their mortgage lender and/or real estate agent. Not sure why most sellers do not pursue a short sale in lieu of a foreclosure, especially if they have a desire of owning another home in the future. So, with that said, here is a brief synopsis of the difference between the two.
1) In a short sale, the bank approves the sale of the property to a new buyer at a mutually agreed upon price. Usually, this price is determined after a seller has requested a short sale package and started the short sale process. The bank will order an informal appraisal through an agent or appraiser called a Broker Price Opinion (BPO) to determine the new market value. After the market value and terms of sale are determined by the bank, your agent can then list and market the property for sale. Selling short may allow the unpaid balance of your loan(s) to be partially or fully forgiven by your mortgage company.
2) In a foreclosure, the bank has taken back the title and ownership of the property and is now burdened with selling the property themselves. Most banks prefer to sell short to avoid attorney and other legal fees. In a foreclosure situation, the owner has walked away from the home or is living rent-free until the bank evicts them from the property. There is usually no cooperation or understanding from the bank.
Although both situations are serious, both will leave a negative impact on the sellers’ credit rating. The financial losses on a foreclosure are much greater for the bank than a short sale.
The impact on your credit rating will take a big hit either way, but you will be able to recover quicker from a short sale than a foreclosure. We closed on a short sale in December for one of our sellers and in less than six months, the seller was approved and moved into another home.