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Mortgage News Matters

What is the Difference Between a Short Sale & a Foreclosure

short sale written on a note

Short sale vs. Foreclosure: What’s the Difference?

Though both short sales and foreclosures provide financial relief to homeowners who are unable to make their mortgage payments, they are two entirely different processes that result in significantly different consequences for the homeowner.

Initiated by the lender, rather than the borrower, a foreclosure is the lender’s last option, in the case that a borrower can no longer make their mortgage payments. In a foreclosure, the lender seizes the borrower’s home to try and make back the money they’ve invested. Most often, foreclosures take place after the homeowner has already abandoned the home, but if the homeowners have not left, they are evicted.

When a foreclosure takes place, it is typically a much quicker process than going through a short sale as the lender will try and liquidate it as quickly as possible.

Foreclosures are kept on a borrower’s credit report for seven years and can prevent the borrower from purchasing a home for 2-7 years after the home is seized by the lender.

A short sale, which is typically a much longer process, is less damaging to a borrower’s credit. And, in some cases, allows the borrower to purchase another home immediately.

To learn more about the difference between a short sale and a foreclosure, contact me today!

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Mortgage News Matters

What is a Short Sale?

for sale short sale sign in from of home

A short sale is when a financially distressed homeowner sells their home for less than the amount that they owe on the mortgage. In this case, all the proceeds from the sale go directly to the lender, and they either (1) forgive the remaining balance or (2) get a deficiency judgment, which requires the homeowner to pay the lender all or part of the difference between the sale price and mortgage amount. In certain states, the difference must legally be forgiven in the case of a short sale.

Key points of a Short Sale

  • A lender must approve a short sale before it takes place.
  • The lender, or bank, requires documentation explaining reasons for the short sale.
  • Short sales typically take up to one full year to process due to a laborious paperwork process.
  • Are not as detrimental to a homeowner’s credit rating, as a foreclosure.

When does a home go into a short sale?

A property will go into a short sale (pending the lender’s approval) when the homeowner can no longer afford to make the mortgage payments. Rather than go into foreclosure, which is more damaging to one’s credit, the homeowner can initiate a short sale process by submitting an application to the lender.

When determining whether to approve a short sale, the lender will look at the following factors:

  1. The home must be worth less than the amount that the homeowner currently owes on it. The lender will often review sales of comparable properties, to make sure that the decision is sound.

  2. The seller must be able to prove they are financially distressed. This requires the seller to show the lender proof of insufficient income or assets to pay the outstanding loan amount.

    It is important to note that the source of the homeowner’s financial trouble must be new and not something they were previously withholding.

To learn more about short sales, contact a VanDyk Loan Originator today!

Categories
Mortgage News Matters

What are the Benefits of Buying a Foreclosed Home?

Sold sign on a foreclosed home

Buying a foreclosed home can be beneficial to home buyers in a variety of ways. The main one being – it’s attractively low price. With most sold well below market value, foreclosed homes could be a great option for homebuyers on a budget!

What is a Foreclosed Home?

A foreclosed home is a property that has been repossessed by the bank or government after the homeowner stops making payments and defaults on their loan.

Types of foreclosures:

  • Pre-foreclosure
  • Short sale
  • Sheriff’s sale
  • Real estate owned

How to find a foreclosed home?

Potential homebuyers who are looking to purchase a foreclosed home can look to some government-backed websites or simply take a drive throughout different neighborhoods, as they would for any other home. Another option is speaking to a real estate agent who may be more knowledgeable of foreclosures in the buyer’s preferred neighborhood.

What are the benefits of purchasing a foreclosed home?

  • Lower than market value price
  • Lower down payments
  • Lower interest rates
  • Elimination of appraisal fees and some closing costs

A foreclosed home is typically set at a lower than market value price. This is a great option for those homebuyers who are looking to purchase but cannot afford many of the homes on the market. Along with this, foreclosed homes tend to have lower down payments and lower interest rates, making them even more affordable. Lastly, when purchasing a foreclosed home, buyers can eliminate appraisal fees and some closing costs, making the home buying process just that much simpler.

To learn more about foreclosures and the process of buying one, contact a VanDyk Loan Originator today!