The Difference Between Short-Sale and Foreclosure

Most experts consider the housing market to be pretty well recovered from the recession and the housing downturn that began in 2008. However, there are still homeowners  out there, either because of circumstances or because they fell prey to the predatory lending practices of some mortgage lenders more than a decade ago, who may find themselves in the uncomfortable position of being underwater on their homes.

There are a couple of industry terms often used to describe situations that involve distressed properties. No matter whether you are a homeowner that owns a distressed property, or a buyer looking for bargains, you may run across these terms “short sale” and “foreclosure” used in conjunction with these properties. They are different in several respects, but the differences can be somewhat confusing.

A short-sale is the sale of a property for less than the property owner owes on the mortgage. This can happen when property values have fallen in a particular area or due to the overall condition of the home, making it difficult for a property owner to sell the property. This type of sale can also occur when a property owner has fallen behind on their mortgage payments, but prior to foreclosure, and the accumulated past payments, late fees, and legal fees create a situation where more is owed on the property than it is worth.

For example, let’s say the appraised value of the home is $400,000, but the amount owed on the home is $450,000. No prospective buyer is going to pay more than the home is worth, so the mortgage company stands to lose $50,000.

The mortgage lien holder is always the first paid at closing on a home, with any excess sale proceeds passing to the seller after all closing costs have been paid. In a short-sale situation, the mortgage company will not be fully paid off with the proceeds of the sale, and the seller is unlikely to have the financial resources to make up the shortfall. This type of sale not only requires the approval of the mortgage company, but it also requires special handling on the part of the Realtor, who must have solid experience successfully negotiating these transactions. 

A foreclosure is very different from a short sale. In a foreclosure situation, the mortgage lien holder has taken legal action against the homeowner for failing to cure delinquency. After a certain amount of time has past, during which the homeowner can attempt to catch-up on payments and accumulated fees, or renegotiate the mortgage terms, the mortgage company will file a default notice with the Recorder’s Office in county in which the property is located.  Foreclosures occur when the homeowner has fallen behind in their mortgage payments.

Once a default has been filed, the property enters a pre-foreclosure period. During this period, the property owner still has an opportunity to pay-off the mortgage balance, refinance, or commit to some other settlement arrangement. If the property owner and the mortgage company are unable to come to terms, then the property is officially foreclosed and signed by a judge. After the foreclosure is finalized, the mortgage company will either sell the property at auction or become the new owner of record on the property, until it can be sold.

Whether you are a property owner in the difficult position of considering a short-sale or facing foreclosure, or a buyer/investor who purchases such distressed properties, there are many details and considerations to these transactions. Learn more in this article on Realtor.com.

Let my team at Keystone Realtors® meet all your real estate needs. I have over 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas, specializing in the high-end, luxury market, as well as working with investors and distressed properties. Visit our website at Keystonesv.com for listings and information. You can contact me at 650-924-2544, or email at paul@keystonesv.com.

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