Short Sale vs. Foreclosure – What’s the Difference?

Whether you’re a buyer or a borrower or home seller, a short sale and foreclosure each present different situations and difficulties that need to be properly addressed to avoid headaches, complications and more work.

What Is A Foreclosure In Oahu Hawaii?

In basic terms… “A foreclosed home is one in which the owner is unable to make his mortgage loan payments and the bank repossessed the home” (source).  If you stop making the mortgage payments on your Oahu house, your lender has the legal right to foreclose on your property so they can attempt to get back the money that they lent you (the house is the collateral you put up for your loan — that’s what a mortgage is). 

A home is typically foreclosed on when a borrower stops making the monthly mortgage payments. The lending institution or bank takes ownership and possession of the property, evicting the borrower unless they’ve already vacated the residence. These properties are then either sold at auction or more traditional means utilizing the service of real estate agents (REO brokers). A foreclosure can potentially damage the credit rating of a borrower, and make it very difficult to obtain a mortgage for many years afterward (see an attorney or CPA for legal professional advice regarding credit scores).

Depending on the state that you live in a foreclosure can work in different ways. Check out the foreclosure process information over here at the HUD Government website. Hawaii was traditionally a non-judicial foreclosure state, but recent laws have sent most foreclosures into the court-regulated judicial category.

What Is A Short Sale?

In a short sale, the home is still owned by the borrower until the actual sale takes place (the bank has not yet foreclosed).

The definition of a short sale is… “short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt” (source: Wikipedia)

In some cases, a short sale is mutually agreed decision by both borrower and lender to cut their losses and avoid the foreclosure process. In a short sale, the home is sold for less than the outstanding balance of the mortgage. The unpaid balance (known as the deficiency) may or may not still be owed by the borrower although rarely do banks come after the seller for the deficiency (at the time of this writing).

The short sales can ironically take a long time. It’s called a “short” sale because your bank takes a “short”, or losing, position on their loan to you. Realistically, the negotiation and paperwork requirements can drag this on for months. If there’s more than one lender involved, it could take even longer. All parties who have an interest in the property must agree to the terms of the short sale, and a potential deal could fall through if even one lender doesn’t agree. Yes, it’s happened.

Short Sale vs. Foreclosure – Your Options

While both options can have negative consequences, a short sale often has less of an impact on the borrower’s creditworthiness because it showed that you made a legitimate effort to work things out with your lender. A foreclosure could impact a borrower’s credit score by 300 or more points, where a short sale may only dent the credit score by 100 points. Talk to a CPA for more information as credit scores and how they’re affected by short sales and foreclosures.

Even more so, borrowers who are foreclosed upon are often ineligible to purchase another home for 5-7 years with a traditional mortgage, where under certain circumstances, a short sale borrower can purchase immediately or within 2 years (rules change – check them frequently).

As many Americans struggle with an economy that has in many places yet to completely recover from the 2008 crash, folks are having a hard time making monthly mortgage payments. Choosing between being foreclosed and initiating a short sale (or a 3rd option…  selling your Oahu house fast  ) is an easy choice for a borrower having troubles paying their mortgage on time.

Sometimes, lenders are willing to work with borrowers to complete a short sale, to avoid the extraordinary legal fees and time consuming process of conducting a foreclosure.

Our suggestion is always this.

  1. Talk with your lender about ways that they can work with you on your loan. We offer this service where we can help guide you in the right direction if you run into issues with your lender — just reach out to us on our Contact page and we’ll discuss your situation.
  2. Attempt a short sale or other program your lender may have that forgives part of your loan, creates a new / more affordable monthly payment so you can start moving forward again, etc.
  3. If the bank isn’t willing to work with you very much, your best option may be to sell your house. Work with a local real estate house buyer service like Oahu Home Buyers to sell your house fast for an all-cash offer. If you’re interested we can look at your situation and make you a fair offer on your house within 48 hours. Just fill out the form on our website over here >>
  4. Foreclosure. Last resort is to let the house fall into foreclosure (yikes). This is the worst possible scenario — the worst. It’ll harm your credit and you could still be left with money owed to the bank even after the foreclosure is finished (deficiency).

By knowing your options, you may be able to dodge a significant impact to your credit score, allowing you to purchase a new home when your situation improves. A foreclosure on your credit report makes that possibility extremely difficult for 5-7 years, so if you have the opportunity, a short sale can be the better option.

Have a pending foreclosure?  We’d like to make you a fair all-cash offer on your house.

Give us a call anytime at (808) 377-4379
(619) 363-4115 or
fill out the form on this website today! >>

Michael Borger

About Michael Borger

Michael Borger is an experienced real estate investment professional with transactions under his belt in multiple states. Michael is trained by the real estate investment professionals from FortuneBuilders and the hit TV show "Flip This House" and is now a mentor in the FortuneBuilders program. His experience and professional, courteous demeanor will help you realize your real estate objectives. When not working, Michael enjoys spending time with his wife Nanae and new daughter Lainey.

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