QUESTION: What is a short sale? Why is it different from a foreclosure? Is one better?

ANSWER: A short sale is a loss-mitigation solution for the lender and the homeowner. The easiest way to know if you may consider a short sale of your home is to ask your Realtor to determine the current market value of your home, then compare that against how much you owe on your home. If the answer is that you owe more than the current value of that home, you are “short.”

Simply put, a short sale is when the mortgage balance is greater than the value of the property. Homeowners who can demonstrate the inability to pay their mortgage could be considered short-sale candidates. Many short-sales scenarios have occurred as a result of the decline in property values and lenders refinancing homes for more than actual values. If you need or wish to sell your home and hope to avoid a foreclosure, a short sale can be a positive solution for you, as the homeowner, as well as the bank.

The goal in a short sale is to work with the Realtor, seller, buyer and lender to find terms acceptable to all, with the lender agreeing to accept less payment than what is actually owed to them. A short sale is sold by the home-owner with lender (third party) approval of the sale terms before a foreclosure takes place and generally results in a gentler “bruising” effect on the homeowner’s credit, for a limited number of years. The homeowner is considered preforeclosure when the bank officially sends a notice of default or a notice that it is taking legal action against the homeowner to collect the debt. A short sale can still take place during the foreclosure process.

There are only two reasons that a homeowner is not eligible for short sale consideration:

1. The foreclosure has already taken place and the home is up for auction.

2. The homeowner files for bankruptcy.

A foreclosure is the process of the bank taking back ownership of a house due to the homeowner’s inability or unwillingness to pay the mortgage. The home-owner loses possession of the property and upon foreclosure it becomes an REO (real estate owned) or bank-owned property. The bank will list it for a price it can obtain on the current market, typically via a local Realtor. The listing price is determined by broker price opinions, recent comparable sales in the area and the condition of the home. This action can cause financial devastation for the homeowner with regard to credit standing for years to come.

So, if a homeowner is faced with a decision, a short sale is a better option than foreclosure is because it saves the homeowner’s credit from being damaged. A foreclosure can drop your credit score by a whopping 300 points or more. A short sale offers a gentler result, with a decrease of credit score by 100 points on the average. It reads on your credit report as a paid lien or paid judgment. This type of report on your credit is much easier and quicker to repair than a bankruptcy or foreclosure.

For more information about buying or selling a home, visit the Greater Manchester/Nashua Board of Realtors online at www.gmnbr.org.

This information has been provided by the Greater Manchester/Nashua Board of Realtors in conjunction with the New Hampshire Union Leader’s Advertising Department. Any questions about the content should be directed to the realty board at 166 S. River Road, Bedford, NH 03110 or by email to info@gmnbr.org.