You might have heard terms like “short sale” and “foreclosure,” especially when discussing the real estate market. Both these terms revolve around homeowners facing difficulties in keeping up with their mortgage payments. Yet, while they might sound somewhat similar, they are distinct in their implications and processes. Gaining clarity on these terms can help you make informed decisions if you ever find yourself or someone you know in a challenging mortgage situation.
So, what sets a short sale apart from a foreclosure in Florida? Learning about the differences can help you make informed decisions if you ever find yourself or someone you know in a challenging mortgage situation.
Short sale
When homeowners owe more on their mortgage than the current market value of their property and cannot afford the mortgage payments, they might opt for a short sale. Only 3% of properties in the U.S. with mortgages have this type of negative equity. In this scenario, you would sell your property for less than the outstanding loan amount, with the lender’s approval.
Generally, you cannot qualify for another mortgage for two years after a short sale and three after a foreclosure.
Foreclosure
Foreclosure is when homeowners default on their mortgage payments and the lender takes legal action to repossess the home. In Florida, this process is judicial, meaning the lender must go through the court system to foreclose on a property. Once the property undergoes foreclosure, the lender then sells it, often at an auction, to recover the money.
Effects on credit
A foreclosure will generally hurt your credit score more than a short sale. Foreclosures can drop your credit score by 200-300 points, and they remain on your credit report for seven years. Short sales, though still negatively impacting your credit, tend to have a lesser effect and might even show up on the credit report simply as “paid” or “settled.”
If faced with the dilemma of choosing between a short sale and foreclosure, consider the implications on your credit score, the length of time you wish to stay in your home and any potential tax consequences. Remember to communicate with your lender, as they may have solutions or alternatives to assist you.
