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The Difference Between a Short Sale and a Foreclosure
Short Sale Explanation
A short sale is one of the scenarios that can happen when your house is being foreclosed.
Many often mistake the two to mean the same thing, but they are two sequential events and two different concepts.
In a foreclosure situation, a short sale refers to a home sale transaction where the homeowner, who is facing foreclosure, sells their house for less than the amount they owe on the mortgage.
The sale amount is used to repay a portion of the outstanding mortgage debt, and most of the time, the lender agrees to accept the sale amount as full payment of the debt, therefore forgiving the difference on the mortgage.
A short sale allows the homeowner to leave without outstanding debt or mortgage.
Short Sale vs. Foreclosure: What’s the Difference?
I made a video all about it, which you can watch at the link below or the attached video above.
What's the Difference Between A Short Sale and Foreclosure?
Both are in a situation where you’re not able to pay your mortgage and many times, you may be upside down on the mortgage.
It means the current value of the house it can sell for is less than the amount you owe on your mortgage – there’s a gap or deficiency.
Going through a foreclosure is tragic and devastating to your credit, emotions, and everything.
In that case, the bank will take the property because it's collateral to your mortgage.
From the bank’s perspective, it’s an asset; from yours, it’s a liability.
If you stop paying the bank, it becomes a non-performing asset from the bank’s perspective, and at some point, they have to take the collateral back. They do that through a foreclosure process.
When that happens, it will devastate your credit for the next 7 years. And even more devastating is that when you recover financially, they can come back and demand you to pay for the difference you still owe from your mortgage, which the home's value didn't cover. They can do that at any point in time.
Here's the difference. Through a short sale, you can not only prevent the bank from foreclosing your property, but there's also a possibility to negotiate so that you don't have to pay for the difference between your mortgage and the home's value. In some cases, you can get the bank to forgive the difference.
What Happens in a Short Sale?
The first step is to find a short-sale specialist. Then you place your property on the market.
When you find a buyer and a short sale specialist helps to negotiate that deficiency, that gap either goes away or you can negotiate it to something that makes sense.
The caveat is you’ll never be in a situation where you can say no because when a buyer comes in on a sale, it will be contingent on that third-party approval, which is the bank.
In summary, a foreclosure is simply the bank taking your home away. As the collateral to the loan you made to buy the house represented by the mortgage, it’s the consequence of not paying it. The negative effect on your credit can extend up to 7 years.
However, short selling is a way to avoid foreclosure and the devastation you’ll experience. Through the process, you can get the difference between your mortgage and the home value to go away or be forgiven by the bank.
What to Do If Your House is Being Foreclosed
You'll often need a short sale specialist to help you as you must do it within the foreclosure notice and the scheduled foreclosure date.
If your house in Northern Virginia is being foreclosed, you can contact me or my team at Greetings DMV.
I have helped hundreds of sellers complete a short sale and walk away from foreclosure with a successful home sale and no debt. If you need assistance selling your property in the DMV, call me at (703) 346-2776 or Dan@greetingsvirginia.com.
