Short sales and foreclosures are both processes that occur when homeowners are struggling to keep up on their mortgage payments, or if they find that their mortgage is underwater. An underwater mortgage is when a borrower owes more money than the home is worth. In both cases, the homeowner loses possession of their property, though the circumstances and repercussions are different.
The extent of the seller’s control is a significant difference between these two processes. In a short sale, a seller will decide to submit a financial package, seeking a lender’s approval to sell the property for less than the amount they owe on it. Therefore, the seller enters into this process voluntarily, which is not the case for foreclosures.
Once a lender approves a short sale, a seller is in charge of selling the property. However, the lender is responsible for the negotiations and determines whether to accept or reject an offer that would result in the lender receiving less than what is owed on their loan.
On the other hand, a foreclosure is a legal action taken by a lender to seize a seller’s property after they fall too far behind on their monthly payments. Although both processes negatively impact a seller’s credit, a foreclosure may have a more damaging impact on a seller’s FICO® Score and how long they have to wait to get a mortgage again. Furthermore, the foreclosure process can be expensive for the homeowner (and lender). Most mortgages have language that the homeowner is responsible for paying all of the lender’s fees and costs incurred in the foreclosure action. This may result in a homeowner choosing to file a bankruptcy.