What is the Difference in Short Sales and Foreclosures?

A short sale is a process in which you sell your home for an amount that is less than what is owed on the mortgage.  The lienholder of your mortgage must agree to this type of sale and in many cases, the borrowers are still not released from their obligations to repay the deficiencies on the loan after the short sale has been completed.  However, it is a viable alternative to foreclosure because many banks find this to be a more attractive settlement than having to go through the process of foreclosure, including the fees related to a foreclosure.

A few of the benefits of a short sale in place of a foreclosure (for you, the borrower) are:

• You will no longer be responsible for the entirety of the loan.
• The sale of your home will be handled just like any other home sale.
• Although your credit is negatively affected from a short sale, it isn’t as bad of a hit as your credit would suffer after going through a foreclosure.  The words “short sale” will not appear on your credit report; rather, it may say something such as “paid in full for less than agreed” or “settled for less” if the bank determines that you are not responsible for the difference in the amount owed and the amount for which the home was sold. The range of FICO score drop could be anywhere from 50 points to 130 points.

A foreclosure, on the other hand, is a process in which the bank takes over the property and handles the re-sell of your home.  The result is that your credit score will likely fall anywhere from 105 points to 160 points and the foreclosure will remain on your credit report for 7 years.  Obviously, a foreclosure is the worst of the two options and should be avoided if a short sale is possible.