What is The Difference Between a Short Sale and Foreclosure

What is the difference between a short sale and foreclosure? and an REO? These terms are used everywhere when it comes to Real Estate, especially in today’s market. I have found that buyers and sellers are very uneducated when it comes to the difference between these and it’s no fault to you if you fall in this category but I hope to educate you briefly on the differences.

Short Sales

A short sale occurs when a homeowner is no longer able or willing to make their mortgage payment and they owe more money on their home loan than their property is worth in the current market. The homeowner can list their property for sale with a Realtor at current market value, and apply for Short Sale approval with their lender in hopes they will take less for the home than the amount of the borrower’s loan.

Short sales are very complicated, in most cases take from 3 to 6 months,  and the outcome is not guaranteed. The bank (lender) is not obligated to take a short sale. Depending on your situation, short sales may or may not be the best option for you as a buyer or seller.

Foreclosures

When a home owner fails to make the payments on his/her mortgage and have not exercised other options, such as a short sale, the lender can begin foreclosure proceedings. Foreclosures are not sold by Realtors but rather auctioned at a Trustee Sale at the Court House in the County where the property resides. Foreclosure properties must be paid for in full, with a cashiers check at the time of the auction or a day or 2 after.

Some of the problems that can occur when buying a foreclosure can be the following: Title problems, Superior loan pay offs, IRS liens, Tenants or owners still occupying the property, and/or structural problems. The price may seem good at auction (priced well below other houses in the neighborhood), but your costs and risks may come after you try to take title. This can be a very risky way to purchase property if you do not have experience in doing so

I do not encourage buyers to consider buying a foreclosure property, unless he/she is an experienced investor.

What Is An REO?

REO stands for Real Estate Owned property.  An REO is different from a foreclosure property in the sense that the bank tried to sell it at a foreclosure auction and was not successful in getting bids, the bank then becomes the owner of the property because the property was not bid on.

The bank will hire a REALTOR to list the property for sell.  In order to list the property for sell as an REO, it is often that a number of tasks need to be done before the listing can go “active” on the market.  Depending on the property and its condition, the bank may need to do evictions of current tenants, trash outs, cleaning/securing, and more.

When making an offer on an REO property, your REALTOR is submitting the offer to the bank (lender) and it will need to be accepted by the bank.  Unlike short sales, the wait time on an REO property to find out whether or not your offer has been accepted and you will or will not be opening escrow, is often anywhere from 72 hours to one week, but this can and will vary.

An REO may or may not be the best option or the best deal, this will vary case by case, but in general, it has been seen that when it comes to an REO, there is usually a lot of money to be made.

Differences between a Short Sale and Foreclosure for Sellers

Issues Successful Short Sale Foreclosure
Credit Score A Short Sales effect can be as brief as 12 to 18 months. Only late payments on the mortgage will show. This can lower the
score as little as 50 points
A Foreclosure will affect your credit score for over 3 years and can lower that score between 250 to 300 points
Credit History A Short Sale MAY NOT be reported on a person’s credit history A Foreclosure will stay on a person’s credit history for 10 years or more
Deficiency Judgment In some successful Short Sales it is possible to convince the lender to give up their right to pursue a deficiency judgment against the homeowner In 100% of Foreclosures (except in those states where there is no deficiency protection in the law) the bank has the right to pursue a deficiency judgment
Future Employment A Short Sale is not to be reported on a credit report and therefore should not be a challenge to employment Most employers require a credit check on all job applicants. Foreclosures are one of the most detrimental credit items for your credit report. This could affect employment
Issues Successful Short Sale Foreclosure
Fannie Mae The homeowner will be eligible for a Fannie Mae-backed mortgage after 2 years The homeowner is not eligible for a Fannie Mae-backed loan for 5 years
FHA
(late on payments)
3 years from the date the FHA Insurance is paid by the lender – not the date of the Short Sale closing before a borrower may be eligible for another FHA loan The homeowner is not eligible for a Fannie Mae-backed loan for 5 years
FHA
(current)
There is NO WAIT for Freddie- or Fannie backed loans if current on all obligations, including installment debt The homeowner is not eligible for a Fannie Mae-backed loan for 5 years
VA
(late payments)
The homeowner will be eligible for a Fannie Mae-backed loan after 3 years The homeowner is not eligible for a Fannie Mae-backed loan for 5 years
VA
(current)
The homeowner will be eligible for a Fannie Mae-backed loan after 3 years The homeowner is not eligible for a Fannie Mae-backed loan for 5 years
Conventional
(late payments)
The homeowner will be eligible for a Fannie Mae-backed loan after 2 years The homeowner is not eligible for a Fannie Mae-backed loan for 5 years
Conventional
(current)
There is NO WAIT for a Freddie- or Fannie backed loan if current on all obligations, including installment debt Future rates may be affected if you have been foreclosed on in the past 7 years

**Use this as a general guide as laws and guidelines are constantly changing. I advise you to consult with an attorney to see what option is best for you.