Difference between short sale and foreclosure

Real Estate Agent with Keller Williams Realty

There are MANY differences between a short sale and foreclosure and if you're considering either one, please read on.  I'll go over a few of the big differences to help you make the best decision for you.

1.  Time it takes to do a short sale vs. foreclosure

short sale... agreement with bank and buyer and you set the time table.  in foreclosure... you are in a reactive position.  You're waiting for the court date or the marshals to walk you out of the house.  You may be hiring an attorney to defend the foreclosure process.  Once you get served papers, it's just the beginning of the foreclosure process...can take 3 months to a year and beyond, and it's still not over.  The end result of a foreclosure is often a deficiency judgement which starts a whole other round of dealing with creditors and collection agencies about the bank to now collect on the deficiency judgement.  The seller is being pursued by creditors demanding to be paid.  Creditors may pursue to garnish wages or take control of other valuables in an attempt to collect a debt. Several more months typically go by before the seller decides to file for protection with a bankruptcy.  Welcome to round 3.  This often requires the services of an attorney, court appearances and a full financial review of your personal finances as the trustee is looking for hidden money to pay off your debt. This process can take several more months before a foreclosure is finalized with no guaranteed result.  Just because you file for bankruptcy, doesn't guarantee it will be granted and at this point you've invested well over a year into the foreclosure process with uncertain results.  With a short sale, you walk into the closing table knowing you're finished with your house and your debt.  You've negotiated and created an acceptable outcome with the bank and you're finished and begin immediately to rebuild.

2.  Credit implications of a short sale vs. foreclosure

Once you sold your house and negotiated a short sale with the bank, the bank stops sending derogitory remarks to your credit report and you can begin to heal and improve your credit history and prepare a new future.  Should you choose a foreclosure, the banks continue to report derogitory remarks to your credit throughout the foreclosure process and continues beyond the foreclosure until either the deficiency is paid in full or negotiated away, or you file for protection via a bankruptcy.  Until either of these options happen, the bank will continue to tarnish your credit making borrowing money unlikely for you in the future until your credit has been repaired.  Many times, we sell homes that are short only to the second bank and wind up paying the first bank in full.  That's not a derogitory report for the first, it's a paid in full which is a good thing.  This scenario would only show a second mortgage that was short and a first paid in full.  Certainly not as bad as a foreclosure whereby you walked away from your obligations to both banks and suffer the consequences of derogitory remarks on both accounts....

3.  Deficiency implications of a short sale vs. foreclosure

with a foreclosure, the bank takes over the house and sells the house to a new buyer for what they decide is a fair market value.  If the value is short and did not satisfy your mortgage balance, then you owe the bank a deficiency and they can and usually do go after you for the balance owed.  You can't just walk away from the balance with a foreclosure.  Often times with a foreclosure, you work out a payment plan with the bank to make up the deficiency while the new owner is living in the same home you're making payments on.  With a short sale however, you enter into a binding agreement with the bank and negotiate your deficiency away with the bank in exchange for selling the house to a new buyer at market value.  With proper representation, a seller often walks away from owing any deficiency to the bank when engaged in a short sale.

4.  Costs between doing a short sale vs. foreclosure

When you file for a short sale, you settle up with the bank for all past due debt and unpaid interest payments and you leave the closing table wtih your file closed and owing nothing back to the bank.  Generally speaking, attorney's fees, realtor fees, taxes, HOA fees are all settled and paid for by the bank, not you.  In many cases, owners walk away from the closing table with money in their pocket from federal programs available to them.  With a foreclosure, the opposite is quite true.  For every month that your payment is short or late or unpaid, the bank takes the unpaid debt and adds it to the unpaid balance that you owe on the house.  Each payment that you missed and all accrued interest payments only creates a bigger deficiency and a bigger demand letter from the bank later.  You can't just walk away from the debt with a foreclosure, and the amout of your deficiency is totally out of your control when you walk away from the house and hand the keys over to the bank.

5.  Control  your future

In a short sale, you still have a voice about the value of your home and have not relinquished control to negotiate the best deal for your home in order to minimize the deficiency owed to the bank.  With that done, you dramatically increase your chances that the bank will accept your offer hold you harmless for any deficiency owed.  With a foreclosure, you intentionally walk away from the home and put full control of your deficiency into the hands of the bank, who has no obligation whatsoever to forgive any deficiency you owe.  They get so pick the sales price and then hold you accountable for the difference.  Is that really something that makes sense to you?

Comments (2)

Dan Hopper
Dan Hopper - Gold Way RE - Westminster, CO
Denver Broker / Real Estate Advocate

You have brought up some good points on both sides of the fence, short sales or foreclosure.  The one thing that will always harm the credit more, regardless of either approach, is the MISSED payments reported to the credit bureaus. 

Jun 13, 2012 12:04 AM
Tom Braunagel
Keller Williams Realty - Trumbull, CT

Thanks Dan.  That's a great point.  Clients read about how others that have done a short sale have suffered from a bad credit report.  The reality is that the bad credit report happened way before the short sale settled escrow.  I've closed short sales where clients have not been late for a single payment and their credit report was not affected at all by the "settled for less than agreed upon" tag attached to their report.  Miss a payment and your credit will suffer regardless of what route  you take.  Couldn't agree with you more!  Thanks....

Jun 13, 2012 08:43 AM