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Difference Between Short Sale And Foreclosure

Taking mortgage to buy a home and then repay the amount to bank or financial institution at regular installment has become a common practice these days. But most of the people cannot be totally sure that they will be able to repay the mortgage because they can’t foresee the unexpected. But in any case, if homeowner defaults in the repayments of a mortgage amount, the house or property may go for foreclosure or short sale as the banks want their money back.

Short sale and Foreclosure are tools to help the borrower to fulfill there financial obligations when he is financially unfit and cannot repay the bank. There are several differences between a short sale and a foreclosure.

What Is A Short Sale?

A short sale is where the homeowner can no longer make payments on the mortgage because of the financial crises, in such situation lender allows him to sell his property and avoid the foreclosure. In other words, a short sale is a mutual agreement between the homeowner and the lender to sell a property for less than the full loan payoff dues. Once eligibility of the homeowner is accepted by the lender, the borrower sells the property and deposits all of the proceeds from the sale to the lender. The lender agrees to leave the remaining loan and accepts the sale proceeds as final payment. Although the lender, may incur a loss, it is a better solution than non-payment from the borrower.

For example, if the outstanding loan amount is Rs 200,000 and the short sale proceeds are Rs 1,75,000, the bank can choose to accept this amount as final payment and then the homeowner can sell his house and make the payment to bank as full and final settlement.


What Is A Foreclosure?

Foreclosure is where the lender takes possession of the property because of non-payment for a long period of time or an unapproved short sale. In other words, foreclosure is when the homeowner stops making monthly mortgage payments and the lender feels that he is unable to repay the money owed to the bank. In a foreclosure, lender takes legal action against the homeowner and takes the possession of the property. This is a legal proceeding in which the bank retains the right to sell the house and makes a forced sale at public auction to get back its dues from the sale.

Difference Between Short Sale And Foreclosure
  • Short sale is a procedure in which the homeowner can put the house for sale on his own whereas Foreclosure is a procedure in which the home or property is taken back by the lending institutions.
  • When comparing the two, short sales are a better option than foreclosures.
  • In foreclosure, the house owner is not party to the sale, whereas in short sale, the owner has all control over the sales.
  • After a foreclosure, a borrower can avail a new mortgage only after five o seven years years. On the other hand, a borrower can avail new mortgage in two years time if the house has been put for short sale.

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