Difference Between Foreclosure and Short Sale (with Comparison Chart)

October 2022 · 4 minute read

short sale vs foreclosureForeclosure is a process in which the lender takes possession of the mortgaged asset when the borrower consistently fails to pay the outstanding payments. On the other hand, Short Sale is a process in which the lending institution allows the owner of the property to sell it, on his own.

The main difference between foreclosure and short sale, lies in the fact, that the two are used at different times, as well as they are initiated by different persons.

These are the two alternatives available in the hands of the homeowner, who consistently fails to make payments of the loan. So, it is imperative for everyone to know the difference between foreclosure and short sale, which can help you in choosing the best alternative.

Content: Foreclosure Vs Short Sale

  • Comparison Chart
  • Definition
  • Key Differences
  • Conclusion
  • Comparison Chart

    Basis for ComparisonForeclosureShort Sale
    MeaningA process in which the lender seizes the property, after the mortgagor defaults in making payments, is known as foreclosure.When the property is sold, at a price which is less than the amount remaining as the balance of the mortgage, it is known as a short sale.
    New MortgageAfter 5 to 7 yearsIn 2 years
    UsedWhen the mortgagor fails to make payment.When the mortgagor fails to make payment, the value of the property under a mortgage is less than what he owes and the lending institution permits.
    Credit ScoreSeverely affectedComparatively less affected
    Initiated and sold byLenderBorrower
    Control over propertyMortgageeMortgagor

    Definition of Foreclosure

    Foreclosure is a legal process, that involves the seizure of property by the lender, kept as collateral under the mortgage, where the homeowner’s right to the property is cancelled, due to default in the payment of outstanding debt. In this process, the property is put to forced sale at an auction by the lender to recover the remaining amount of the loan.

    Foreclosure is a civil lawsuit, generally used by the mortgagee to terminate the mortgagor’s interest in the property, through the court order. In this process, the court fixes the date up to which borrower is allowed to make payment of the debt along with the foreclosure expenses and redeem the property.

    If the borrower fails to repay the loan amount, then the lender can freely sell the foreclosed property. Proceeds received from the sale of the asset is first utilised in the repayment of the loan, and the remaining amount (if any) is handed over to the homeowner (borrower). The borrower remains liable if the foreclosed property is not sold and also for the balance amount if the property is sold but the sale proceeds are not enough to cover the entire debt amount.

    Definition of Short Sale

    A short sale is an option, usually exercised when the homeowner owes more debt than the mortgaged asset will likely to generate proceeds and the borrower is unable to pay the outstanding debt, then the lending institution opts for short sale i.e. expresses his consent for a short payoff. In this way, the property is not foreclosed, and the homeowner is allowed to put his property for sale on his own.

    The remaining balance owed to the lender is known as a deficiency. It is a complicated and time-consuming process as it requires a lot of paperwork and multiple approvals.

    Key Differences Between Foreclosure and Short Sale

    The significant differences between foreclosure and short sale are provided below:

  • Foreclosure is a process in which the lender seizes the property after the mortgagor defaults in making payments. Short Sale is when the property is sold, at a price which is less than the amount remaining as the balance of the mortgage.
  • The borrower can take the advantage of new mortgage after 5 to 7 years in foreclosure and after two years in case, the property is put to short sale.
  • Foreclosure is used when a mortgagor is unable to make payment. As opposed to the short sale, when the mortgagor defaults in payment, the value of the property under a mortgage is less than what he owes, and the lending institution permits.
  • In foreclosure, the credit score and history of the borrower are severely affected, whereas in a short sale the same is comparatively less severely affected.
  • The lender initiates the foreclosure procedure and the sale of the property. On the other hand, the short sale procedure is initiated, and the property is sold by the borrower.
  • The mortgagee exercises control over the property in foreclosure. Unlike, short sale, in which the mortgagor has control over it.
  • Conclusion

    The biggest point of difference between these two terms is that foreclosure is forced sale i.e. something that happens to you forcibly, but the short sale is a voluntary sale i.e. something that you do. Both have their own pros and cons. However, a short sale is a better option but requires more paperwork than in a foreclosure.

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