Owning a home is an exciting milestone in anyone’s life, but homeownership also comes with great fiscal responsibility. Very few people choose to/are able to pay for their home in cash, so the most common option is to secure a mortgage from a lender in order to purchase the home.
There is a variety of things that can go wrong, and some homeowners find themselves in situations in which they cannot afford the home that they bought. Whether lenders set an approved mortgage amount that is much higher than it should be for the homeowners, or other financial hardships come along, like job loss, accidents, medical bills, and so on. For those that fall behind in their mortgage payments and can no longer afford to own the home, there are a few options available.
The most commonly heard of is a foreclosure, and the other is called a short sale. There are distinct differences between a foreclosure vs short sale, and we will go into them in more detail below.
Losing a home due to the inability to pay the payments is a tough reality to face, but knowing the types of options available, and how they can impact potential buyers, can help. Taking a closer look at a short sale vs foreclosure, you can better understand the process
What Is a Short Sale?
A short sale is the lesser-known of the two, but it is usually an option presented to mortgage lenders by the distressed homeowners, as an alternative to foreclosing. Essentially, a short sale means that the house is agreed to be sold for less than what the outstanding mortgage is worth on it. This typically doesn’t happen that often because for a short sale to occur, the value of the home has to be less than what it was appraised for.
This can happen if the home was appraised incorrectly or the market took a hit. For example, say a homeowner got a mortgage for $300,000 to purchase a home five years ago, and now, the homeowner lost a job and is unable to make the mortgage payments anymore. After conducting a market analysis, the home is now worth just $200,000, but the homeowner still owes $225,000 on the mortgage.
In order to short sell the home, the homeowner must ask the lender for permission to sell the home for its new value, in hopes to square up on the mortgage. A short sale situation is beneficial to both parties because the homeowner gets to prevent having a foreclosure hit their credit, and the potential for bankruptcy to be avoided, and the lender often agrees to this situation because a foreclosure on a home is an expensive and lengthy process.
What Is a Foreclosure?
A foreclosure is when the mortgage lender repossesses a home from a homeowner who is unable to make payments. Typically, the last option for the lender because it seizes the home as collateral on the outstanding mortgage owed. Unlike a short sale, a foreclosure is acted upon by the lender and usually occurs after the homeowner has vacated the home.
If the homeowner still occupies the home, they will be evicted. Once the lender has assumed ownership of the home, it will have its own appraisal done, in order to get a true value of the home and sell it. The goal is to sell the home and recoup the initial investment on the home. This situation is the last resort in the mortgage process because of the negative impacts that it has on the homeowner and the financial burden on the lender.
Homeowners that go through a foreclosure will have to wait a minimum of five years if they wish to purchase another home, and their credit score will drop by more than 100 points.
Foreclosure vs Short Sale
After diving into these two situations a little deeper, it really isn’t that these two are options to choose between, but instead more of steps in the process. It is especially important that, during the home buying process, you are realistic about how much of a payment you can afford, thinking about if financial situations arise and that the value of the home isn’t inflated or undervalued.
Working with an experienced real estate agent throughout the process, especially if it is your first time, can help eliminate some of the rookie mistakes or major problems that could occur down the road. Our team has been serving homebuyers of the Valley for nearly 20 years. When it comes to a name that you can trust in the real estate market in Phoenix, Jeff Barchi is unmatched.
Visit our website to start your search for your next dream home, today!