What Exactly are the Major Differences Between a Foreclosure and a Short Sale?

With distressed properties, there are generally three options available to a homeowner. The first is to modify the terms of the loan so the homeowner can make the payments and keep the house. The second is to complete a short sale, and the third is for the home to enter foreclosure.

For those unfortunate enough to not qualify for the first option, short sales and foreclosures are the remaining outcomes.

A short sale is a process by which the homeowner and the bank sell the home for less than it is worth. This generally happens when a homeowner cannot make the payments, and the home’s value is less than the amount owed on a loan.

When this happens, the seller and the lender work together to sell the home for as much as possible. Both must agree to the terms of the sale, and a bank is not obligated to accept. These are also pretty complicated and time-consuming, with the average time to close at 3-6 months.

A foreclosure is when the lender takes possession of the property from the homeowner in order to fulfill a debt. The homeowner is not a part of the deal, and the sale of the property is between the lender and the buyer. Foreclosures are sold primarily through real estate auctions.

The key difference between the two is the involvement and liability of the homeowner. A short sale gives the homeowner an option to avoid foreclosure, and allows the homeowner to sell the home (with the lender) to satisfy an amount usually less than what the loan is worth. If the bank agrees, the homeowner is not liable for the rest of the loan.

In a foreclosure, the homeowner is not involved in the process. Plus, if a foreclosure auction does not cover the entire cost of the loan, the homeowner can be liable for the difference in some states.