You’ve inherited your parents’ house, but it’s more of a financial burden than you thought it’d be. It needs repairs before it can be rented or sold, but you never wanted to get into real estate.
Or maybe you’re a landlord who wanted to purchase an investment property, but the only properties you could afford don’t attract the best of tenants. They’re behind on payments, which has made you behind with your lender.
Now it’s down to short sale vs foreclosure. But what’s the difference? Are they the same thing? Or is one better than the other?
First, Let’s Define Foreclosure
A foreclosure is when a bank takes possession of a house because the homeowner has failed to make payments on it.
How Long Does it Take for the Foreclosure Process to Begin?
Not making any payments for 120 days puts you at risk for foreclosure. Once 120 days have passed, it then varies by state as to how your lender can begin the foreclosure process. In some states, a judicial procedure needs to take place, while in others, it isn’t necessary. This is referred to as either a judicial foreclosure or a nonjudicial foreclosure. As you might expect, nonjudicial foreclosures happen faster than judicial foreclosures. To see whether you live in a judicial or nonjudicial state, click here.
How Long Do You Have to Get Out of Your House After Foreclosure?
There’s not a set period of time. You’ll receive an eviction letter that states how long you have to move out. The period of time can be anywhere from 3-30 days.
How Much Does a Foreclosure Hurt Your Credit Score?
It depends on what your credit score is before the foreclosure. The higher it is, the more it will drop. With this in mind, you could lose between 85-160 points if your house is foreclosed upon.
Because it’s a negative entry, it’s likely to stay on your credit report for up to seven years.
Now, Let’s Define Short Sale
A short sale is when the homeowner owes more money on the house than what he or she would get if it were sold; however, for whatever reason, the lender has agreed to let the homeowner sell his or her house. In a nutshell, the lender comes up short once all is said and done. This means the bank is going to get less money but has agreed to release the homeowner from any further mortgage obligations once the house has been sold.
Is a Short Sale Bad for Your Credit?
It’s certainly not great. It’s considered a negative entry, and, as such, will stay on your credit report for up to seven years. Your credit report will then have one of the following descriptions to indicate a short sale occurred:
- Settled for less than the full amount due
- Deed-in-lieu of foreclosure
- Negotiated settlement
- Settled debt
Most people who have a short sale usually see, on average, their credit score drop between 120 and 130 points.
How Does a Short Sale Work for the Seller?
Since the bank has to approve it, there are a few things that need to happen before the short sale process can occur. To qualify for a short sale, most of the following need to be demonstrated:
The market value of your home has dropped: Local recently sold homes need to be shown to the lender to prove the house is now worth less than when it was bought. In other words, you need to be able to prove your house has depreciated since you bought it.
You are in financial distress: Whether this is because you inherited the home and cannot afford to maintain it, you’re a landlord with unreliable tenants, you lost your job, or you racked up medical bills, if you can show there is a reason for your financial distress, you’ll have an easier time qualifying.
The mortgage is close to defaulting: Depending on the lender, it can take 2-3 months before the lender considers beginning the foreclosure process. If you have defaulted on payments, this is a clear sign you are in financial distress.
You have no assets: For this, your lender will want copies of your tax returns to determine that you don’t have any assets. If you do have assets, the lender will likely not approve the short sale. If the lender does, you may be required to pay the difference between what you owe and what you got after the sale.
Short Sale vs. Foreclosure: Which is Better?
In the bank’s eyes, a short sale is often preferred because if you live in a judicial foreclosure state, it saves them any expenses they might incur to foreclose. Plus, foreclosures are often more difficult for them to sell. In the end, it’s better for them to get some of what they are owed instead of none at all.
Also, keep in mind that a foreclosed home affects the value of other nearby homes. This can lead to even more loss of revenue for banks if they are one of the primary lenders in the area (or if widespread depreciation leads to more short sales because of upside-down mortgages).
When it comes to your well-being and welfare, a short sale is also the better option of the two. This is for a few reasons.
If you are smart and talk with your lender before you are unable to make payments, your credit score won’t suffer from all of the late payments prior to the short sale. Yes, it’s easier to get approved if you’ve already started to miss payments, but if you know that in the near future you won’t be able to make payments and begin a dialogue with the lender prior to defaulting, you could potentially avoid all of the missed payment entries on your credit report.
If you go through a foreclosure, it is possible the bank will sue you for a deficiency judgment. They know they will be unlikely to recoup the full amount of the difference between what they received and what they were owed, but it won’t stop them from getting what they can. To make things worse, this judgment will stay on your credit report for seven years in addition to the missed payment entries and foreclosure entry. Saying your credit score will take a hit from a foreclosure is quite an understatement.
Homeowners often have to pay legal fees when they are going through a foreclosure. These fees usually hover around $7,500. Of course, many people are unable to pay these fees, which results in more negative entries on the credit report.
Who Would Buy Either Type of Home?
Foreclosure homes often require extensive work, and because of this, usually require a conventional loan. FHA and VA loans require the house be in good working order before the purchaser buy it, so the future buyer would likely need to get a conventional loan or pay in cash. Conventional loans often have stricter minimum credit scores and require a higher down payment. For these reasons, many home buyers don’t even consider conventional loans. Warranted or unwarranted, there is a stigma against buying foreclosures.
Short sales can also be more difficult to sell if the reason the house depreciated is likely to stay around. Perhaps the neighborhood has taken a turn for the worse, or a nearby development has made the house permanently less appealing. For whatever reason, your typical home buyer isn’t going to be interested, and selling it may take a lot longer than you’d like.
As with the foreclosure mentioned above, you’ll be battling with the many stigmas associated with short sales. People are going to ask “what’s wrong with it?” Even if they can’t find anything, they’ll assume there’s something wrong that they don’t know about.
More often than not, both short sales and foreclosures require an investor to come along.
Save Time by Selling Your House to an Investment Company
There are a few investment companies out there (here are some tips to find them), but SoCal is probably the most efficient and fair. The purchase process is fast because we pay with cash.
Rather than let your house go into foreclosure or begin the process of defaulting on payments, SoCal will buy your house before things get complicated and messy.
Don’t Wait, Contact SoCal Today
Submit your contact information and property address to SoCal today. The sooner you do, the sooner you’ll be able to move on with your life.