Foreclosure vs Short Sale - What You Need To Know
What You Need To Know?
Foreclosure is the result of a borrower's inability to return the debt amount to the lender. The bank 'repossesses' the property whereas in short sale, the house is auctioned to raise the debt amount and pay the lender.
While the homeowner loses the house in both cases, short sale is still a preferred option from the two.
This hub gives a comparison between the two to help
the homeowner distinguish between the pros and cons of foreclosure and
Suppose you mortgaged a house
in lieu of loan and after some time, you forget to repay the installments
in time. Therefore, what the lender does is sell the property. Since
this is a legal procedure, which involves large amount of money, the
return from selling the property gets utilized by the lender to pay
off the debts incurred. The whole process is called ‘the lender has
foreclosed its mortgage’.
There are two types of foreclosure
available: foreclosure by judicial sale and foreclosure by power of
sale. These days, the clause of ‘acceleration’ finds mention in
the deed, which gives an opportunity to the borrower to clear the remaining
debts. If the borrower is unsuccessful, the mortgage goes for foreclosure.
Borrowers can avoid foreclosure
through alternate financing, re-financing or even bankruptcy. On the
other hand, the debtor may claim for equitability from court to stop
foreclosure. The court gives permission for this if the debtor is able
to make a bond upto the amount owed. This step is taken to protect the
interests of the lender. There have been cases when the debtor has challenged
the amount of debt but such cases are an exception. Generally, there
is enough paperwork to prove the debt.
This comes under the category
of real estate. In this, the homeowner can sell the mortgaged property
in an auction provided the lender agrees to such transaction. The proceedings
from the sale go in clearing the debt to the lender. Sometimes, the
bank or the lender may agree to discount some amount but there is no
guarantee for such benefit. This arrangement gets preference most of
the time as foreclosure can be avoided. In business dealings, short
sales are the desired option.
However, there are other departments, which may prevent short sale such as HELCO lenders, tax lien holders, mechanic’s lien holders, and HOA. If there is mortgage insurance loan, then the insurer also becomes a party to this transaction and the insurer may oppose it as the insurer needs to ‘pay’ a part of the claim to ‘offset’ the lender’s loss resulting from short sale. Thus, we see, short sale is more complex than foreclosure process as it needs to undergo several approvals and parameters.
For this reason, short
sales have higher failure rates than successes. Since it is difficult
to get full knowledge of the process and glitches, the homeowner needs
to hire specialists like mitigation specialist, short sale specialists,
or real estate lawyers for complete smooth working of formalities.
Which Is The Better Option For Homeowners?
When the question is to save
a home, one needs to tread the path carefully. At the outset, let me
say that foreclosure should be avoided at all cost. It leaves an indelible
and negative credit report drowning you for years to come. Apart from
this, the lender may ask for a judgement against you to pay for the
foreclosure costs. You lose home and you lose more money!
In contrast, short sale is the next best option. Not only you pay less than the amount owed but also the expense incurred on this is much lesser. The biggest hurdle is to get the lenders and the allied services to agree on this arrangement. Most of the time, they do not!
Another disadvantage of short sale is
its negative impact on ‘credit score’. You lose around 200 points
but unlike foreclosures, this effect can be overcome by keeping at least
one credit card active for some time.
The last tip - Make sure you
pay debts in time. If so happens that you find paying installments difficult,
do not wait for nature to take its course. The more you delay; chances
are that foreclosure will remain the only option, sadly. Take hold of
the situation and contact a professional right away to avoid foreclosure
through short sale.
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