10 Benefits of Short Sale over Foreclosure

From a lender's perspective, it's better to recover a portion of a mortgage loan than to absorb a total loss. Therefore, in lieu of a foreclosure, banks will often settle for a short sale. This allows both the lender and the homeowner to end up in a better position.

One concern for many homeowners, however, is whether the bank will sue for a deficiency judgment after foreclosure. In an attempt to recover the difference in the amount that was paid and the amount of the loan, the bank can file a lawsuit against the homeowner. A deficiency judgment will appear on a homeowner's credit report and have a negative impact, just as a foreclosure would [source: Experian].

But rather than endure a costly and possibly lengthy litigation process, a bank will often cut its losses with homeowners who are unable to pay their mortgages due to a proven hardship, such as a divorce or loss of income. And the reduced amount of money owed will ease the burden on the homeowners and not irreparably damage their credit.

A foreclosure on a home adversely affects the homeowner in a number of ways, and it also has a negative effect on the lender and the housing market in general. The homeowner receives a mark on his or her credit that can make it difficult -- sometimes impossible -- to borrow money for another home, car or major purchase. This can essentially remove the former homeowner from the pool of large-purchase consumers, a key part of the nation's economic engine, for years. Banks nearly always lose money on foreclosures; between the lower sale price they receive at auction and the resources they must assign to administer the foreclosure process, it's rare for them to come out ahead at the end of a foreclosure [source: Experian].

The housing market also suffers from foreclosure, due to decreased home values. A 2010 report by the Federal Reserve Bank of Cleveland estimated that a foreclosed home not only dropped in value, but caused homes within a 260-foot radius to lose up to 1 percent of their value, as well [source: Hartley]. Foreclosed homes are less likely to be maintained and more likely to remain on the market for an excessive period of time, and they make it difficult for homeowners with good credit to upgrade into more expensive homes.

Therefore, if a foreclosure can be avoided, it's in the best interest of everyone involved.

The average legal cost to a homeowner going through a foreclosure is around $7,500, according to the U.S. Congress Joint Economic Committee. Add in the additional costs that can accumulate throughout the sometimes lengthy foreclosure process, which could be just the tip of a burdensome financial iceberg. And if the homeowner is unable to afford payments, the foreclosure could eventually lead to a financial situation where bankruptcy -- with its significant credit implications for the borrower and costs for the lenders -- is the only option [source: Christie].

Mortgage lenders won't always file for a deficiency judgment in a foreclosure case. It depends on the situation and the likelihood that they can win back the amount owed on the property. However, if all sides agree on a short sale, a new buyer in a better financial state could absorb some of what the original homeowner owes the lender. This would ease the original homeowner's hardship and put him in a more manageable position [source: Foust].

Likewise, a short sale can drastically reduce the amount a bank may be looking to recoup from the homeowner. For example, if a short sale lets the homeowner sell a $200,000 home for $175,000, the bank will be much less likely to pursue a deficiency judgment.

As we mentioned, a lender is also negatively affected by a foreclosure. After the cost -- and time expense -- of sending multiple notices and warnings to a delinquent homeowner, the lender faces additional costs as the foreclosure moves into the courts. Legal filings, hearings and the associated documentation all take time and money to prepare. After the foreclosure sale, the lender may sue to recover money that's owed above the amount that a home was sold for in a foreclosure, adding to legal costs. Also, since the lender gains ownership of the property, the lender faces the expenses and dilemmas every homeowner faces when selling a property: If it takes time to sell, it can become a very expensive burden. Even if the sale doesn't stretch on, the lender must still hire a real estate broker to administer the sale of the house [source: Foreclosure.com].

However, in opting for a short sale, the lender can recover a portion of the money that's owed on the property, thus reducing the loss without the extensive legal process of a foreclosure. In many cases, a short sale reduces the lender's total loss to a level where it's more financially savvy for him to write it off, rather than sue the former homeowner [source: Foreclosure.com].

Many homeowners have spent years building up equity in their homes, only to watch it vanish as a result of the housing crisis. The housing market has been saturated with underpriced homes due to foreclosures, and finding buyers for many of these properties can be very difficult.

The wave of foreclosures has been damaging to the economy on a number of levels. Property values drop in neighborhoods occupied by multiple foreclosed houses. Once vibrant areas must now manage blight as it creeps into neighborhoods filled with empty, bank-owned houses [source: All About Real Estate Short Sales].

Short sales can help resuscitate a neighborhood by making it easier for buyers to get into homes at affordable prices. By giving buyers and sellers an option that avoids the nuances of a foreclosure sale, short sales can reduce the number of excess homes for sale in a neighborhood, in turn reducing the number of unkempt, vacant houses [source: Foust].

Like sellers who wish to get out of unaffordable homes, prospective homebuyers benefit by not having to endure the red tape and bank auctions associated with the purchase of a foreclosed home. And since a short sale may be able to recoup a higher percentage of a home's value than a foreclosure auction could, short sales can keep overall home prices from falling to abnormally low levels [source: Dempsey].

The short sale process may be less complicated than a foreclosure, but it still requires the homeowner to go through a multistep process that's more complicated than a traditional home sale. The benefits of this work, however, are great: The homeowner will most likely be in much better shape in the long run by opting for a short sale over a foreclosure [source: Rapoport].

Short sales present a profitable niche to real estate agents who take the time to understand the process. Capitalizing on the growing number of short sales in many areas can help an agent stand out from other local agents, and it may create a new source of business in the face of a still-slow housing market. Specialized short sale training is increasingly available to agents, and the effort that goes into learning this angle of the real estate market can pay big dividends [source: National Association of Realtors].

There's no certainty surrounding any investment, and the word "foolproof" should never enter the mind of a prospective investor. But a savvy investor can do well for himself, while at the same time benefiting struggling homeowners, by considering short sales.

The purchase of short sales can be advantageous to an investor in a number of ways. Below-market-value buying prices, competitive selling prices and the easy accessibility to information about the home are a few of the incentives. Plus, the increased popularity of the short sale market can present a wealth of opportunities to an astute investor [source: All About Real Estate Short Sales].

A short sale investor will also have the latitude to work out deals with homeowners, such as renting their property back to them or setting up a workable plan that may give them the chance to rebuild their credit.

Once the ball starts to roll in a foreclosure, an arduous and stressful process begins for the homeowner. The mailbox starts to fill up with demand letters and confusing documents, and constant exchanges with the lender's legal team ensue.

In a short sale, there are still negotiations, meetings and paperwork for the homeowner to weave through. But the process plays out more like a traditional sale, as opposed to a litigious and pressure-packed foreclosure proceeding.

Any real estate sale can be somewhat stressful, but a short sale will allow the homeowner to play more of an active role in the process and deal mainly with the bank, the homebuyer and the real estate agent. Overall, a short sale is much more manageable for the homeowner than being at the mercy of a bank's attorneys during a foreclosure [source: Foreclosure Questions].

Facing a foreclosure on one's property is disheartening enough. But there are dishonest opportunists waiting for the chance to pounce on stressed, vulnerable homeowners, potentially making matters much worse.

A number of well-publicized scandals related to foreclosures have taken place over the last decade. Many involve scam artists who offer money-back guarantees, catchy slogans and promises to save homes from foreclosure in order to get access to struggling homeowners' funds. The homeowners often come out of these fraudulent deals owing even more money and with no relief from foreclosure.

Opting for the short sale route will greatly diminish opportunities for scam artists to dig their claws into vulnerable homeowners. The short sale process works very much like a regular sale, and the homeowner will get to know the professionals with whom they're working. This will all but eliminate the possibility of a scam artist becoming involved in the transaction [source: Freddie Mac].

Real estate transactions generate a whirlwind of activity between the buyer and the seller, and they're often stressful by nature. But they don't compare to the pressure that a homeowner is under during a foreclosure. The major credit hit, the drawn-out legal process and the overall stigma attached to foreclosure can be quite unnerving [source: Foreclosure Questions].

Short sales are not exactly risk-free when it comes to the seller's credit, and they won't completely diminish the financial implications when homeowners are unable to pay for a home that they purchased. But a short sale will open the door to solutions for homeowners that can allow them to avoid legal action and the lengthy, laborious foreclosure process.

Short sales can leave homeowners in a much more positive position, lessen their financial burden and salvage their credit to a degree. A short sale can provide "light at the end of the tunnel" to homeowners and offer them a platform from which to start rebuilding financially [source: Foreclosure Questions].

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