Difference Between Short Sale and Foreclosure

Home owners take a mortgage while buying a house and are expected to repay the amount at regular installments. If the owner defaults payments, the lending institution seizes the house. In 2007, the real estate market experienced a crash, which resulted in a large number of house owners defaulting on their mortgage payments.

The following are the main reasons for these defaulted payments:

• The borrowers of the real estate were subprime and they had low chances of repaying the amount without refinancing the house at lower interest rates.

• The house was sold in an up market; however, the homeowners could not sell the real estate at a profitable amount as expected due to the market crash.

Home prices suddenly declined while interest rates skyrocketed to the point of non-affordability wherein homeowners were unable to even pay the taxes imposed by the government and they became a victim to foreclosures wherein the financial institution or the bank that lent the money took over the mortgaged house and auctioned it at a much lower rate and closed the deal. In order to avoid further downfall of the real estate market, homeowners were assisted by the government to stop such foreclosure deals.

In terms of real estate, short sale refers to selling a home at a price that is inadequate to meet the pending mortgage payments owed on the property. In this case, lenders are willing to accept the settlement at a price lower than what was agreed initially to avoid costly foreclosures or lengthy mortgage repayment time. Short sales was considered to be a better option than foreclosures though both these phenomenon had equal negative impact as far as the credit defaults were concerned.

However, there are certain striking differences between foreclosures and short sales:

• In order to get a new mortgage loan after foreclosure, the borrower has to wait for nearly five years after the completion of the foreclosure process during which he needs to accumulate the desired credit points. In the case of a short sale, the borrower needs to wait just for 2 years.

• The Making Home Affordable (MHA) Program was launched by the government in order to avoid further foreclosures and to stabilize the real estate market. The mortgage payments were made affordable both for primary as well as secondary mortgages. Borrowers who are unable to repay despite the MHA could opt for short sale. In this case, the homeowner would be given an allowance of $1,500 for relocation and also the seller would be exempted from taxes on the forgiven amount if the sold property was his or her primary residence.

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