Short Sale vs. Foreclosure

Difference Between Short Sale and Foreclosure For a lender or a home owner, short sale and foreclosure are…

Difference Between Short Sale and Foreclosure

For a lender or a home owner, short sale and foreclosure are the most fear-stricken words. But when a home owner ducks on payments of EMI to the bank from where he took a home loan, both of these gain importance. When you take a loan from the bank, they ask for collateral. Banks normally don’t sell the property that you have given as collateral, but rather they aim at retrieving the money they have lent. In these cases banks can use short sale and foreclosure as weapons to protect their capital that they gave as loan and the increased interest. Although sometimes in helpless cases, they are compelled on selling.

Short sale

If once you have taken a loan from a bank and are unable to pay it back due to fierce circumstances, then with the help of short sales you can sell your property. This way one can avoid foreclosure. The amount to which the home owner sells his property is lower than unsettled loan amount. When he pays this amount to the lender, the lender agrees to leave out the due loan amount and accepts it as final payment. But this is confirmed first by the bank, only if it agrees to forget about the remaining amount. As the amount paid is less than the remaining loan amount, it is called a short sale. For instance if the difference in the loan amount and the short sale proceeds is only $25000, the bank agrees to accept this amount and the homeowner sells his house. The reasons to why a bank accepts short sale are if they feel that the property cannot manage more than that amount, or people are moving to new homes or if value of the proper has lessened.


Here is the reason why every single homeowner frets the word “foreclosure”. A foreclosure comes into being when the bank suspects that the homeowner cannot manage to pay back the loan amount. In this the bank can sell the house in order to retrieve the outstanding amount. However, if the amount to which the house is sold is greater than unpaid amount, then the homeowner gets the extra money.  The homeowner then suffers a series of shocks as he loses his home and also 200 to 300 points in his credit score. The consequence of this is that now he cannot look forward to applying for another loan in future.  The homeowner is left with no other choice than settling and negotiating with the bank.

The only similarity between the two is that they aim to lessen the burden on the homeowner when he is unable to pay back the dues. But majorly the two of these are very different.

Amongst the two, the one that would bring slight happiness to a distraught homeowner would definitely be short sale. But then again there is a strenuous task of searching for a buyer who takes time in deciding and agreeing for the short amount and keeps the homeowner in a hazy situation. The benefit that the homeowner gets in a foreclosure is that the responsibility of selling the house is taken by the bank which provides him with a period of 4 to 12 months of stay in the house. So in the meanwhile, as the homeowner is not asked to pay anything, he can start saving money for transfer at the time of vacating his house.

One common thing that takes place between the two is the decrease in the credit score of the homeowner. In short sale homeowner is kept from buying a property for 2 years whereas in forclosure the time period raises from 5 to 6 years.


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