Short Sale vs. Foreclosure

Short Sale vs. Foreclosure

The difference between a short sale and a foreclosure is that with a short sale the seller still has control of the property, whereas a foreclosure is bank owned, (and also called a REO, real estate owned).

Here are the definitions:

A short sale is a sale which the sale proceeds fall short of the balance owed on the property’s mortgage. Typically this occurs when a borrower (seller) cannot make the payments on their loan. The lender decides that selling the property at a loss is better than the cost of foreclosing, which can cost the lender upwards of $70,000-$80,000!  Both parties must consent to the short sale process. This agreement does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.

Foreclosure is the legal process by which a lender (can be the 1st or 2nd lien holder), repossess a property after the borrower (owner) has failed to comply to the terms of the mortgage. The most common violation of the mortgage is a default in the payments of the promissory note. When the process is complete, the lender can sell the property and keep the proceeds (if any) to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage”. If the promissory note was made with a recourse clause (Florida is a recourse state) and then if the (foreclosure) sale does not bring enough to pay the existing balance of principal and fees, the lender can file a claim for a deficiency judgment (against the borrower).

Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes, unpaid contractors’ bills or overdue homeowners’ association dues or assessments.

When you purchase a property, with a mortgage, the promissory note describes the payments, interest rate and additional terms (30 year, 15 year, etc.) and is the promise to repay the money borrowed. A mortgage is security for the debt (note).

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