When homeowners who fall behind on their mortgage payments or are underwater on their home mortgage, they face two primary options: short sale or foreclosure. While both processes involve parting with the property, short sale and foreclosure are not equal.

A short sale is a voluntary a transaction in which the lender agrees to accept less than the mortgage amount owed by the current homeowner. For example, if a homeowner owes $200,000 on the mortgage but sells the property for only $170,000, the remaining balance – $30,000 – is what the seller is “short” of and owes the lender. If the lender accepts the short sale terms, the lender can choose to either forgive the loan debt and release the borrower from further liabilities or attempt to collect the remaining balance via a delinquency judgement.

Conversely, a foreclosure is an involuntary process in which the lender takes legal action to seize the property if the borrower is unable to make mortgage payments for a certain period of time. When a foreclosure is completed, the lender gains ownership of the property and sells it to recoup the amount of money owed on the mortgage.

Unlike short sales, foreclosures are initiated only by the lender and must be handled according to a specific set of rules, including issuing notifications and providing opportunities for the borrower to settle the loan debt. The impact of a foreclosure is much more damaging to the delinquent homeowner’s tax return and credit rating than that of a short sale. A foreclosure will stay on the borrower’s credit report for seven years and preclude them from purchasing another property for five years.

Short sales don’t damage credit scores to the same extent, and people who go through this process can usually take out a mortgage and purchase another home without having to wait. Because short sales leave homeowners in a more positive position by lessening the credit and financial implications, it is the wisest move for those mortgagors. A short sale, however, can only proceed with the lender approval.

If you are having trouble bringing your mortgage payments current, talk to your lender and discuss your options. Lenders will generally want to avoid the time-consuming legal filings and costly resources associated with foreclosure. By opting for a short sale instead, they may recover a portion of the amount owed on the home without having to go through court.

If you are interested in purchasing a home or refinancing your current home, call me today!