Unexpected financial challenges, such as job loss, rising interest rates, and medical bills, can put homeowners in a tough spot, especially if they have mortgage payments to keep up with. If you’re having a hard time paying your mortgage, and your home is worth less than what you owe, there are two options: a short sale or foreclosure.
Both involve giving up the home, but the processes and consequences differ significantly.
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What Is A Short Sale?
A short sale occurs when a homeowner sells their property for less than what they owe on their mortgage. However, the lender must agree to accept the reduced price, otherwise the deal won’t go through.
How It Works:
The homeowner requests permission to do a short sale. They’ll provide financial documents to their lender that prove hardship, e.g. job loss or medical expenses.
If approved, the home is listed for sale, and all proceeds from the sale go to the lender.
The lender may either forgive the remaining mortgage balance or pursue a deficiency judgment to recover the difference.
What Is Foreclosure?
Foreclosure is when a lender takes legal action to repossess a home because the homeowner has missed several mortgage payments. The lender then sells the property to recover their loss.
How It Works:
After multiple missed payments, the lender begins the foreclosure process.
The homeowner may receive notices that say they have the opportunity to get current before foreclosure is finalized.
Once foreclosure is complete, the lender takes ownership and sells the property, often through an auction.
If the homeowner still occupies the home, they will be evicted.
Short Sale Vs. Foreclosure: 3 Key Differences
1. Impact On Credit Score
Both options hurt your credit score, but foreclosure has a more severe impact.
A short sale may lower your credit score by 100+ points, but the debt is often reported as “settled” as opposed to “unpaid.” It’s harder to recover from the latter.
A foreclosure can drop your credit score by 200+ points, and it can stay on your credit report for up to seven years. Obviously, this means qualifying for future loans is harder.
2. Future Homeownership Opportunities
Following a short sale, you can qualify for a new mortgage within a couple of years, depending on how fast your credit recovers.
After foreclosure, you may be required to wait seven years before you try to apply for another home loan.
3. Homeowner Involvement
In a short sale, the homeowner does have some say in the selling process. That is, they can select a real estate agent and negotiate a date for move-out.
In foreclosure, the owner is not in control because the lender initiates and executes the process, which tends to result in involuntary eviction.
Which Option Is Best?
A short sale is generally the better option if you can make it work, as it doesn’t damage your credit as much and offers more room for negotiation. But if you’re unable to make payments, and the lender won’t grant a short sale, foreclosure is unavoidable.
Need To Sell Your House Fast?
If you’re on a tight budget and require a speedy, hassle-free home sale, Metro Milwaukee Home Buyer stands ready to assist you. We purchase houses in any condition for cash, handle all paperwork, and close fast. With us, you won’t have to worry about foreclosure, and you’ll keep your credit intact while you seek financial security.