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Difference Between Short Sale and Foreclosure
Homeowners typically buy a home by taking a mortgage for which the house functions as a collateral. The homeowner is likely to make timely mortgage payments, failing which, the house is seized through the lending institution. The real estate marketplace crashed in 2007 and resulted in many people defaulting on mortgage repayments. The reason for defaults could be attributed to the fact that the borrowers were sub prime and their only possibility of repaying the borrowed amount hinged on the ability to refinance the house at a lower rate of interest. Another possibility was selling from the house in an upmarket and therefore encashing the built up home equity. This hope was thwarted because the home owners were unable to sell off the house for a profit on account of the housing market accident. Rising interest rates as well as declining home prices led to defaults. In fact, many borrowers were not able to pay the taxes imposed through the Federal and the State and became an easy target for tax lien house foreclosures.
Short sales, in the context of real estate, refers to selling off a house at a price that is insufficient to meet the mortgage repayments still owed on the home. In this case, lenders may be willing to accept the proceeds from the short sale as settlement your money can buy due and forgive the residual amount that cannot be requited. The reason why a lender might be willing to accept less payment, than what is actually due, is to avoid lengthy and costly foreclosure procedures.
Foreclosure Vs. Short Sales
Given that the government is providing assistance to homeowners to prevent a foreclosure, short sales seems just like a better option. According to Fair Isaac company, both foreclosures and short sales have the same level of negative impact on credit scores. They result in credit scores declining by 200 in order to 300 points. However, significant differences exist in between short sales and house foreclosures. The points of difference between short sale and foreclosure can be summarized as follows:
Waiting Time: In case of lenders complying with Freddie Mac and Fannie Mae recommendations, the borrower needs to wait for 5 years after completion of a foreclosure to avail a brand new mortgage, subject to establishing the required credit score. Whereas in case associated with short sales, the waiting period is only 2 years.
Benefits to the Borrower: On February 18th, 2009, the Obama Administration introduced the Making Home Inexpensive (MHA) Plan. This program aims to stabilize the housing industry by reducing mortgage obligations, on both primary and secondary mortgages, to affordable levels, thus preventing avoidable house foreclosures. Borrowers, who are unable in order to retain their homes despite being covered under MHA, may opt for short sales as an alternative to foreclosure. Under this plan, the homeowner may wake up to $1, 500 as relocation cost after short sales. Moreover, the seller does not have access to to pay taxes on forgiven debt provided the home that was sold had been his primary residence.
Benefits to the Loan provider: Under the Making Home Affordable Program, lenders are encouraged to modify distressed loans to ensure affordable payments. As an extension of the program, lenders can also receive incentive payments up to $1, 000 even if the homeowner's loan isn't modified, provided short sales tend to be allowed.
Hence, in the current situation, a short sale is more preferable than a foreclosure. However both foreclosures as well as short sales will force the borrower to work at building his damaged credit history. According to Freddie Mac and Fannie Mae recommendations, assuming that the seller intends to buy a home some time again later on, he would require a minimum FICO score of 680 for loans. FHA insured loans would require the borrower to possess a credit score of 580 with regards to getting a mortgage after foreclosure.
