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What is the difference between a short sale and a foreclosure?

If you’re in the market right now, you may be wondering if you can get a good deal by buying a foreclosed or short sale home. If you’re new to the world of short sales and foreclosures, it’s actually a pretty simple process and one that could get you a good deal if you’re willing to take the risk.

In either case, the ownership is being transferred back to the lender and you won’t be buying from the family that owned it unless it’s still in the short sale phase, in fact, the foreclosed home will take place by auction. Take a look at what these two terms mean, what it means for you, and if you should buy a home in this situation.

What is a foreclosure or a short sale?

A foreclosure is commonly used when a borrower defaults on loan payments with their lender, so the lender takes repossession of the property. A short sale happens when a foreclosing home is in the pre-closure period where the lender has filed the Notice of Default before foreclosure has completed. A home that sells during the period between the filing and the foreclosure would sell as a short sale.

A borrower that ends up defaulting on their loan and has to have the home repossessed by the lender will benefit more from a short sale since a foreclosure is much more harmful to their credit score and a short sale avoids many of the harmful effects of that.  While a foreclosure happens because of a borrower defaults on their payments, a short sale happens when a borrower isn’t able to make payments, owes more than the home’s worth right now, and the lender agrees to it.

How homebuyers end up with a short sale or foreclosed home

If you’re in the market for a home, you may have come across a home that is foreclosing or in the short sale part of the process. There used to be many more of these on the market a few years back and fortunately, families are doing better today with fewer default notices and bank repossessions taking place. if you do happen to find one, it could end up being a great deal for you as a buyer.

Start by working with an agent that is willing to look for these types of properties knowing that you are looking for a good deal. You can usually find an agent that specializes in finding these properties and selling them.

Is it advantageous for me to buy a foreclosing home?

There are pros and cons to going this route in your home search. First off, the biggest advantage is that you’ll likely be able to score a better deal since they are often priced below retail and lower than comparable homes. This means that your mortgage will be lower than it would have been and you’ll owe less in interest on the entire loan.

This is also great for those that want to renovate or improve the home because it will be easy to build equity fast, which increases the net worth, and gives you the option of borrowing against the equity in the future. Don’t forget the fact that buying a short sale home means that you’ve saved the original owner from going into foreclosure, which is very harmful to their credit score.

Watch out for the other end as there are some downsides to going this way. You’ll likely end up with a home that needs renovations or repairs because if the owner couldn’t pay their monthly mortgage, they also probably weren’t handling the maintenance.

Find out before buying what you’ll be faced with if you become the owner since repairs can get expensive. It also could have vandalism while it was vacant which would add to your repairs, although it may be reflected in the actual price of the home anyway. You’ll have to decide if the savings in the short sale is worth it compared to the amount of money you’ll need to renovate.

There aren’t as many short sales and foreclosures out there, so when one becomes available, there may be heavy competition to snatch it up. In the case of a short sale, your seller may not be willing to negotiate since there is an outstanding mortgage balance to cover, but they may be more motivated to sell to someone else that isn’t trying to negotiate. In addition, be prepared for a lengthy closing timeframe up to 90 days since the original lender has to approve the sale.

If you’re up for the challenges that come with buying a home like this, it could benefit you greatly in the long run. That is a look at the difference between a short sale and a foreclosure, and what it means to buy one of these properties.

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