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

If you are a homeowner having trouble making your mortgage payments, you may have considered doing a short sale or letting the home go into foreclosure. You must understand the difference between the two so that you can make the best decisions for your future.

A short sale of real estate happens when the sale proceeds fall short of the balance owed on the property’s loan(s). If a homeowner can’t make the monthly payments and the house can’t be sold for the amount of the loan(s) and other liens, then the lender may agree that selling the property at a loss is better than foreclosing on the loan. A lender may agree to a short sale if the homeowner can show financial hardship such as job loss, high debt from medical bills or business loss, or other financial difficulties that a homeowner will not be able to overcome.

A foreclosure is a legal process in which a lender or other lien holder seeks to take back a property if the homeowner stops making the payments or hasn’t met other commitments, like paying real estate taxes or homeowner association fees.

Illinois is a “judicial foreclosure” state. This means that the lender or other lien holder files a lawsuit to show that the borrower has missed payments. If the homeowner doesn’t make up the amount owed in a specific period of time, the lender may ask the court to allow that the property be sold at auction to pay off the debt. In Illinois the County Sheriff conducts an auction in which anyone can purchase the home to pay off the debts. Usually, though, the only “bidder” is the lender who owns the mortgage. The lender takes back the property and after a series of other legal steps is allowed to sell the home to pay off the mortgage.

Other options for distressed homeowners are loan modification programs or deed-in-lieu of foreclosure.

Know your options: consult your lender, a real estate attorney, a government-sponsored counselor, a tax professional and a real estate broker experienced with short sales.

SHORT SALE VS. FORECLOSURE: WHAT’S THE DIFFERENCE?

Item Short Sale Foreclosure
Fannie Mae Guideline (Primary Residence) Eligible for new Fannie Mae insured loan after 2 years, no restrictions. Eligible for a new Fannie Mae loan with restrictions after 5 years, no restrictions after 7 years.
Fannie Mae Guidelines (Non-Primary Residence) An investor who has done a short sale is eligible for a Fannie Mae backed mortgage after 2 years. An investor who has had a property foreclosed cannot get a Fannie Mae backed loan for 7 years.
Credit Score Late payments on a mortgage will appear after completion of a mortgage. The effect can be as short as 12 to 18 months. Credit score affected by 50 to 100 points. Typically will affect credit scores for at least 3 years. Scores may be negatively affected between 200 and 300 points.
New Credit Application Questions (Form 1003) No questions on an application regarding a short sale. Questions: have you had property foreclosed upon or given title or deed in lieu in the last 7 years?
Credit History A short sale may or not be reported by a lender on a credit history. Remains as a public record for 10 years or more.
Security Clearance Usually does not raise red flags regarding security clearance. Security clearance will be questioned.
Deficiency Judgement Negotiable between seller and lender. No negotiations between the home-owner and the lender. It is up to the lender to file a deficiency judgement.

This post was written by Leslie Ebersole and originally published on FoxValleyRealEstate. Use or reproduction without express consent of the author is prohibited.

About Leslie Ebersole

Leslie Ebersole has written 4 posts in this blog.


Leslie Ebersole with Baird & Warner Real Estate services buyers and sellers in Kane County and DuPage County, about 40 miles west of Chicago. She lists and sells homes in St Charles, Wayne, Geneva, Batavia, Elburn, Bartlett and West Chicago.

1 comment to Short Sale vs. Foreclosure: What’s the Difference?

  • Leslie,

    Well written as usual!

    Note that Texas is a “non-judicial” State. Rather than going to court to seek a foreclosure, the Trustee will give the borrower and the public notice prior to selling the property at a Trustee Sale. Trustee Sales take place on the first Tuesday of each month at (or nearby) the county courthouse.

    Tom

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