What’s the difference between a Short Sale and a Foreclosure?

A Short Sale is when the homeowner owes more than the property is worth, and cannot pay back the difference. They are short of full payoff. Here’s an example: Let’s say the homeowner buys a house for $200,000, with a primary mortgage of $160,000, and a secondary mortgage of $40,000. 2 years later, they need to sell the house but the values have dropped. Now the house is worth $170,000. If they put the house on the market at $200,000, they will get no buyers interested in the house and no offers. If they put the house on the market at $170,000, they will have to bring $30,000 to sell the house, or see if the bank would take less for the house than the full mortgage (a short sale).

The word Foreclosure can mean a couple of different things, depending on when in the foreclosure process that particular house is in. If a house is “in foreclosure” that usually means that they were served a notice of intent to foreclose. This is usually the period of the notice up to the sheriff sale. The redemption period is after the sheriff sale and before the bank takes the house back. This period is called the “redemption period” or “6 month right of redemption period” or usually “in foreclosure”.

After the bank takes the property back, it is called “foreclosed” or “bank owned” or “reo”, which stands for Real Estate Owned.

To sum it up, a short sale is when the seller owes more than what the house could sell for, and cannot come up with the difference, and a foreclosure is when the seller is delinquent on payments. A house can be be both a short sale and in foreclosure at the same time as well.

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