If you’re in bad financial shape, you may find that you’re in danger of losing your home. Although it’s not an ideal situation, knowing the difference between foreclosures and short sales can help you out during a tough time. You may find that you have more options than you previously thought.
Most people immediately jump to a foreclosure as the inevitable result of falling behind on mortgage payments. A foreclosure is the legal process by which the lender terminates the owner’s right to the property. Essentially, the bank is taking back your home because you missed payments. Even worse, after they reclaim your home, they can still come after you for those missed payments and the cost of the foreclosure process. Additionally, a foreclosure is a big black mark on your credit and will take you years to recover from.
Foreclosures in a nutshell:
- The bank retakes your home
- They can still come after you for missed payments
- They can still come after you for the cost of the foreclosure
- Ruins your credit for at least a few years
Short sales happen when you work with your lender to sell your home for less than the amount of the loan. Your bank might decide that the slight loss on the property is better than coming after you for the missed payments. However, a short sale comes with its own issues. While short sales don’t hurt you as much as a foreclosure, they can still cause your credit to drop – often by as much as 200 points at once. Also, a short sale does not necessarily mean the entire loan is forgiven. You may still have to pay the difference between the proceeds from the sale and the cost of the mortgage.
Short sales in a nutshell:
- You and your lender agree to sell the home for less than the loan balance
- The bank may still want you to pay the differences
- Your credit score will drop, but not as drastically as a foreclosure
If you think you’re facing a foreclosure, it might be worth your while to seek a short sale. Work with a real estate agent to determine the best option for you if you’re in financial straits. The earlier you start considering your choices, the better off you’ll be. If losing your home seems like a certainty, then get a real estate agent to help you navigate the muddy waters of foreclosures and short sales.
