What's the difference between short sales and foreclosures?
Short sales and foreclosures are two financial options available to homeowners who are behind on their mortgage payments, have a home that is underwater or both. The term short sale refers to the fact that the home is being sold for less than the balance remaining on the mortgage – for example, a person selling a home for $150,000 when there is still $175,000 remaining on the mortgage. A foreclosure is the act of the lender seizing the home after the borrower fails to make payments. This is the last option for the lender, since the home is used as collateral on the note.
There are different reasons for why a homeowner would opt for a short sale versus a foreclosure. The owner is forced to part with the home in both cases, but the timeline and other consequences are different in each situation.
Before the process can begin, the lender that holds the mortgage must sign off on the decision to execute a short sale. Additionally, the lender, typically a bank, needs documentation that explains why a short sale makes sense; after all, the lending institution could lose a lot of money in the process.
If approved for short sale, the buyer negotiates with the homeowner first and then seeks approval on the purchase from the bank second. It is important to note that no short sale may occur without lender approval.
Short sales tend to be lengthy and paperwork-intensive transactions, sometimes taking up to a full year to process. However, short sales are not as detrimental to a homeowner's credit rating as a foreclosure is. A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home immediately.
Unlike a short sale, foreclosures are initiated by lenders only. The lender moves against delinquent borrowers to force the sale of a home, hoping to make good on its initial investment of the mortgage. Also, unlike most short sales, many foreclosures take place when the homeowner has abandoned the home. If the occupants have not yet left the home, they are evicted by the lender in the foreclosure process.
Once the lender has access to the home, it orders its own appraisal and proceeds with trying to sell the home. Foreclosures do not normally take as long to complete as a short sale, because the lender is concerned with liquidating the asset quickly. Foreclosed homes may also be auctioned off at a "trustee sale," where buyers bid on homes in a public process.
In most circumstances, homeowners who experience foreclosure need to wait a minimum of five years to purchase another home. The foreclosure is kept on a person's credit report for seven years.
The answers already given are correct but I just want to ad one more item. In a short sale, the lender ends up writing off the loss (difference between the sale and the mortgage). This loss is then reported as income to the seller of the house since it is a loan forgiveness. An example would be that Bob sell his house for $225,000 but the mortgage is $235,000. The mortage company agrees to take the $225,000 as payment of the mortgage and they will write off the $10,000 as a loss but will send a 1099 to Bob for him to report the $10,000 as income on his tax return. Bob will pay the taxes on the $10,000 which could be as much as $3,900 if Bob is in the top tax bracket.
A pre-foreclosure is a property in the process of foreclosure but is still legally owned by the owner. It may or may not be a short sale. A short sale is when an owner is selling a home worth less than the mortgage owed on the home
A short sale is when the lender agrees to allow you to sell your property short of the note (amount owed on the property), hence short sale. The lender has to approve the amount. A foreclosure is when the lender repossesses the property from you.