A foreclosure is a legal process in which a property is taken from its owner by a lien holder or trustee because the owner has not fulfilled her obligation to the lien holder. Usually, this means the property owner has failed to make her mortgage payments. A short sale is a property sale in which the sales price is less than the amount owned on the property. An owner typically initiates a short sale to avoid foreclosure.
Foreclosure rates from 1980 to 1990 averaged under 1 percent. Between 1990 and 2000 they edged up to just over 1 percent. In 2007, however, the foreclosure rate doubled in one year, surpassing 2 percent. A 2009 study out of the University of Virginia, highlighting the continuing historically high rate of foreclosure, noted that most foreclosures had occurred in only four states: California, Nevada, Florida and Arizona. The most troubling statistic came from California, which accounted for 10 percent of the nation’s housing units but 34 percent of the foreclosures in 2008.
A foreclosure is initiated by the lien holder. Foreclosure processes vary from state to state. They are either judicial–meaning the foreclosure must go through a court process–or non-judicial. In some states, like Florida, the process is usually non-judicial but can be judicial in certain circumstances. Some states have redemption periods in which the former owner may buy back the house. Depending on the process, a foreclosure could take anywhere from 40 to 270 days.
Short Sale Process
An owner initiates a short sale. He places his property for sale, receives an offer, negotiates until he is ready to conditionally accept and then passes the sales contract on to the lender or lenders who also must approve the sale. Included with the sales contract is an explanation of hardship from the seller. It explains why he has to sell the property and cannot continue to make loan payments.
In some states once a foreclosure has occurred the mortgaged debt is wiped out, whether or not the value of the property is as much as the loan. In others, it does not. Still others have different rules for different types of loans and different processes. In Florida, for instance, the lender of a first mortgage used to purchase a home cannot go after a borrower for the loan balance after a foreclosure unless the process went to court–which usually does not happen. If it did go through court, however, the owner also has a redemption period in which to reclaim the house by full repayment. Also in Florida, if the loan was made through a refinance, the lender can go after the borrower for the difference through what is called a deficiency judgment. Short sale rules are similar; however, the property owner can write a forgiveness requirement into the sale document so that the lenders–regardless of whether the loan was for purchase or refinance–cannot go after him for the difference.
Either a short sale or a foreclosure can impact a home owner’s credit score by a loss of 85 to 160 points. Typically the higher a borrower’s score was to begin with the more points he will lose. Both situations will result in a loan not being fully repaid and are considered equally serious defaults by credit reporting agencies. However a short sale may only affect your credit for 2-3 years were as a foreclosure impacts your credit for up to 10 years. An important consideration in deciding whether to try a short sale or wait until foreclosure occurs if it cannot be avoided is whether the creditors will have the right to obtain a deficiency judgment. If they will, it is worth attempting a short sale with a condition that the loans be wiped out by acceptance of the sales contract.