Short Sale vs Foreclosure In San Francisco Bay Area
Owning a home can turn into a real headache if unexpected financial problems arise. Falling behind on mortgage payments or finding your property worth less than what you owe can mean saying goodbye to your dream home. When this happens, you have two options – foreclosure and short sale. Foreclosure happens when you miss mortgage payments, and the lender can auction your property. On the other hand, a short sale is when you choose to sell your home for less than your mortgage amount. Your lender needs to approve this, and they may forgive the remaining balance or ask you to pay it after the sale. Interested in learning more about foreclosures and short sales? Keep reading this blog!
What is a Short Sale vs Foreclosure?
A homeowner who finds himself burdened by a distressed property can lose his home to foreclosure or a short sale. Although both can affect one’s credit report, foreclosures differ greatly from a short sale. To understand short sales and foreclosures better, let us differentiate them.
Short Sale Process
A short sale happens when a property is sold for less than what’s owed on the mortgage due to financial trouble. The lender needs to agree to this sale to get all the money after the deal is done. They may forgive the remaining debt or make the borrower pay it by getting a deficiency judgment.
For example, if the homeowner owes $250,000 but the home’s value is only $225,000, the $25,000 difference can either be forgiven or collected by the lender.
Even though it may seem like the lender loses out, especially if they forgive the remaining debt, it’s better than going through foreclosure. Foreclosures are costly and can create more problems for the lender as things go on. On the other hand, a short sale benefits both lenders and homeowners. Even though the home sells for less, everyone still gets what they want in the end.
Foreclosure Process
If you have a mortgage loan, foreclosure is probably the scariest word for you. The foreclosure process occurs when a property is seized by the bank due to a homeowner’s failure to pay his monthly mortgage payments.
Remember that a mortgage contract puts a lien on a house, so when the mortgage holder fails to pay, lenders repossess the property and sell it in a foreclosure auction to recover the mortgage owed.
Foreclosures won’t do any good to the lender and the homeowner. The former would take a great financial loss because the ongoing costs of foreclosure aren’t cheap, while the homeowner’s home would just be one of the foreclosure properties the bank owns.
Pros and Cons of Short Sales
Knowing what a short sale is won’t really help you decide if it’s the best way to pay off your mortgage loan. You have to look at its pros and cons and weigh them carefully before deciding.
Pros of Short Sale
Helps Avoid Foreclosure
The main advantage of when a homeowner sells through a short sale is avoiding the foreclosure stage. This means you will be free from all or some of your mortgage obligations even though your house is underwater.
Saves Time
Foreclosures generally require a long process. It may last from months to years, depending on how quickly the court can decide since they deal with many foreclosure properties.
If you list your home for sale on the market via a short sale, you can save time and effort. Short sale properties are also sold without renovations, which can save you money.
Credit Rating Recovery is Faster
Although a pre-approved short sale can impact your credit report, you can recover from it faster than foreclosure. You will see an improvement in your credit score after two years of selling the short sale property, and you’ll be allowed to get financing approval for a new home.
Lender Covers Fees
In a pre-approved short sale, certain lenders may cover agent fees and closing expenses, understanding the homeowner’s financial position.
No Need to Move Out Immediately
You can remain in the property until the short sale is finalized. However, this isn’t feasible during foreclosure as the property must be emptied before it can be sold. This is akin to municipal auctions, where the owner must vacate the property. The owner remains accountable for any outstanding taxes.
The Lender Covers Relocation
If you qualify for relocation assistance during a short sale, the lender will provide you with a certain amount that can cover moving fees, a security deposit to a new apartment, etc.
Cons of Short Sale
Home and Equity Loss
If you choose a short sale over foreclosure, you may lose any equity in your home. Plus, there’s the risk of losing your home altogether, which could worsen your financial situation, especially if the lender demands payment for any remaining debt.
If you lack funds for a down payment on a smaller home, consider renting until you’re financially stable again.
More Parties are Involved
In a short sale, the homeowner and their realtor aren’t the only ones in the mix. The lender and the company handling the short sale talks with the lender also play a role. This can add complexity and drain the homeowner’s energy.
More Complicated Due to Multiple Liens or Mortgages
Short sales can get complex. When there are many liens on a property, everyone involved needs to agree to the sale. Those holding the liens usually want a share of the sale money before they okay the short sale. If not, they may start foreclosure.
Deficiency Judgment
Depending on your mortgage provider, they may forgive or not forgive the remaining amount on the short sale. If they don’t forgive it, you’ll still be responsible for a deficiency judgment. Your lender can take legal action to reclaim the outstanding debt.
Relocation Payment is Taxed
Assuming you were able to submit all the requirements to be granted relocation relief, the amount you’ll receive can be taxed. In other words, you won’t really get the full amount you initially thought you’d get when you opt for a short sale.
Pros and Cons of Foreclosures
Knowing what a short sale is won’t really help you decide if it’s the best way to pay off your mortgage loan. You have to look at its pros and cons and weigh them carefully before deciding.
Pros of Foreclosure
Negotiation of Loan Terms
Lenders prefer helping homeowners over losing money in foreclosures. So, they may adjust your mortgage or suggest refinancing to ensure you can make payments. Negotiating mortgage terms usually happens only when foreclosure is imminent.
New Beginning
Practically, once foreclosure starts, paying a couple of months’ worth won’t halt it unless you settle the entire debt. If losing your property is inevitable, you can cease monthly payments at the onset and stash your funds for later.
Save Up Money
Practically, once foreclosure starts, paying a couple of months’ worth won’t halt it unless you settle the entire debt. If losing your property is inevitable, you can cease monthly payments at the onset and stash your funds for later.
Cons of Foreclosure
Loss of a Home
Similar to a short sale, the loss of a home is the hardest part of going through foreclosure. Although you can potentially buy it back through the right of redemption, the chances are very slim given the financial hardship you are in.
Damage to Credit
When a property goes into foreclosure, it can lower your credit score by over 100 points and remain on your credit report for at least seven to ten years. This could make it challenging to secure a new mortgage for a home in the future.
More Complicated Due to Multiple Liens or Mortgages
Short sales can get complex. When there are many liens on a property, everyone involved needs to agree to the sale. Those holding the liens usually want a share of the sale money before they okay the short sale. If not, they may start foreclosure.
Deficiency Judgment
Depending on your mortgage provider, they may forgive or not forgive the remaining amount on the short sale. If they don’t forgive it, you’ll still be responsible for a deficiency judgment. Your lender can take legal action to reclaim the outstanding debt.
Relocation Payment is Taxed
Depending on your mortgage provider, they may forgive or not forgive the remaining amount on the short sale. If they don’t forgive it, you’ll still be responsible for a deficiency judgment. Your lender can take legal action to reclaim the outstanding debt.
Short Sale: Frequently Asked Questions
What’s the Most Common Alternative to a Short Sale?
The top substitute for a short sale is opting for a deed in lieu of foreclosure. It’s when the homeowner willingly gives up ownership of the property to the lender to escape the mortgage. This spares the homeowner from selling the house, thus avoiding real estate agent involvement. Apart from a deed in lieu of foreclosure, other popular options instead of a short sale include modifying, refinancing, or reinstating the loan, negotiating forbearance, renting out the property, or leasing it for eventual sale.
Can a Buyer Walk Away From a Short Sale?
Yes, a buyer can bail on a short sale if the seller or their agent doesn’t give the nod or reply to the offer within the agreed timeframe specified in the short sale paperwork. This window usually lasts from 30 days up to a year and is pretty standard when short sale homes are sold like regular listings.
Also, the potential new owner can pull out even after the short sale is greenlit. This may happen if there are undisclosed issues uncovered during the home inspection, if the seller breaches the contract, or for other reasons.
This scenario hardly pops up with cash deals since cash buyers snag up real estate-owned (REO) properties regardless of their condition (usually below market value).
Can a Seller Back Out of a Short Sale?
Yes, although less common than buyers backing out, home sellers can back out of short sales, too. This is permitted if the seller wants to cancel the listing and the listing agent agrees. In some cases, the seller can also back out if he receives a higher offer or changes his mind and would rather proceed to foreclosure.
How Often Do Short Sales Fall Through?
Short sales often fail in real estate. Just 40% of them actually close. This can occur if the property has a second mortgage, numerous tax liens, or if there are disputes between the seller and buyer. The lender can also halt the sale.
How Long Can a Short Sale Stay on the Market?
In an ideal scenario, short sales ought to be swiftly sold within 30 days to promptly settle any outstanding payments. Yet, the duration a short sale can linger on the market varies as per mortgage lender policies. It’s advisable to inquire with your lender regarding the timeframe available to list your property.
Why Would a Lender Refuse a Short Sale?
A lender may decline a short sale in the real estate market for two main reasons. Firstly, if they operate in a deed of trust state where foreclosure expenses are reduced. Secondly, if the property holds significant potential and numerous eligible buyers are anticipated to show interest in purchasing the foreclosed home at market value during an auction. This latter scenario aligns with their objective of maximizing profits.
Foreclosure: Frequently Asked Questions
Who Owns the Foreclosed Property?
Basically, when a home gets foreclosed, it becomes the property of the lender. They label these properties as REO or bank owned. But the original homeowner’s name remains on the title until the redemption period finishes, even though they no longer own the REO property.
Who Pays Foreclosure Costs?
Typically, the lender covers expenses for foreclosed properties. This is why lenders prefer collaborating with buyers to prevent foreclosure via short sales, refinancing, or other alternatives.
Foreclosure expenses incurred by banks include legal fees, attorney fees, title searches, property preservation fees, private process servers, and late charges before acceleration.
What are the Documents Involved in a Foreclosure?
The documents involved in a real estate foreclosure are the original loan documents, complaint for foreclosure, a notice of default, lender documentation, a notice of lis pendens, property appraisal, and summons to the court.
How Long Does a Foreclosure Take?
The property foreclosure timeline typically spans six months to a year, varying based on specific situations. Judicial foreclosures tend to last longer than non-judicial ones because of legal proceedings. Additionally, state regulations and other variables may influence the transfer of ownership for foreclosed or real estate owned (REO) properties.
Final Thoughts:
Short Sale vs Foreclosure In San Francisco Bay Area
Selling your home quickly can ease the stress of financial trouble. Short sales and foreclosures often lead to losing your home. However, if these are your only choices, weigh the benefits and drawbacks. A short sale may hurt your credit less and let you apply for a new mortgage sooner.
If you’re in a tight spot and need to sell fast, We Buy Houses in San Francisco Bay Area is here to assist! We’ll make a fair cash offer and handle the closing swiftly. Plus, we’ll take care of the closing costs!
Just fill out the form below or call us at (408) 557-7554 for a quick sale.
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Author: Saini
My name is Saini, and I founded the We Buy Houses in San Francisco Bay Area team with years of experience in the real estate industry. I have assisted numerous sellers in selling their homes quickly, “AS-IS”, and for a fair price.
He’s been featured in multiple publications including Yahoo Finance, GoBankingRates, LegalZoom, The Mortgage Report, Apartment Therapy, US News and World Report, and SuperMoney among others.