In the real estate market, short sales and foreclosures are different methods that borrowers and lenders can use to cut their losses and get out of undesirable loans. Each involves its own unique considerations; and whether you are looking to buy or sell, understanding the differences between short sales and foreclosures can be important to making informed decisions that protect your financial interests as much as possible.
What Is a Short Sale?
A short sale is a transaction between the owner of a mortgaged property (the “mortgagor”) and a buyer that involves selling the property for less than the outstanding balance on the mortgage. A property owner may seek to conduct a short sale if the value of the property has dropped significantly since the owner’s purchase—to the point that the owner owes more than he or she can expect to recoup from selling the property.
Short sales require lender approval, and lenders will consider a number of different factors in deciding whether to approve a proposed transaction. Selling price is a major factor, but the balance on the mortgage, market conditions and other considerations will come into play as well. As a result of the need for lender approval, short sale transactions will often take longer than conventional real estate sales, and both buyers and sellers should be prepared to deal with additional hurdles and paperwork during the process.
What Is a Foreclosure?
Unlike a short sale, a foreclosure is a transaction between a buyer and a bank. If a property owner fails to make mortgage payments and does not obtain approval for a short sale, the lending institution can repossess the home through the foreclosure process. Under a conventional mortgage, the property serves as “collateral” for the loan, which means that the lender has the legal right to take ownership of the property if the mortgagor’s (i.e. the homeowner’s) obligations go unsatisfied.
For buyers, the foreclosure market can be highly competitive. While banks will often sell foreclosed properties at a significant discount, there are both pros and cons to buying a foreclosure.
Key Differences between Short Sales and Foreclosures
With these general explanations in mind, here are some of the key differences between short sales and foreclosures:
- In a short sale, the mortgagor still owns the property. As a result, the mortgagor can still negotiate the sale price (subject to lender approval) and seek other concessions to protect his or her financial interests in the transaction.
- Unlike a short sale, a foreclosure involves the bank taking ownership of the property. The mortgagor loses all right to participate in the sale of the property. In addition, a foreclosure will typically have a substantial detrimental impact on the mortgagor’s credit rating.
- The approval process involved in short sales often means a prolonged path to closing. In contrast, foreclosure sales tend to move much more quickly. To keep up with the competition, prospective buyers will commonly need to bring cash to the table.
Contact The Del Carpio Office in Santo Domingo, D.R.
With offices in Santo Domingo, the attorneys at The Del Carpio Office provide experienced legal representation for buyers and sellers in real estate transactions throughout the Dominican Republic. If you are underwater on your mortgage or are thinking about buying a short sale or foreclosure send us a message online to speak with an attorney today.