Buying a Short Sale Vs. Foreclosure
Which is Better?

Learn which option is a better deal for home buyers.

Short sales - properties in better shape, work with sellers but take forever - won't make hb tax credit deadline. Rumors lenders do not have incentive to do short sales - make more on foreclosures.

Foreclosures - short wait, no liens, worse shape

In 2010, between 30% and 60% of all homes for sale continue to be either short sales or foreclosure sales. Both types of transactions can result in great deals for first time home buyers, but each has advantages and pitfalls.

A foreclosure sale is a property sold by a mortgage lender that has taken back ownership of the property after a home owner has failed to pay the mortgage. The mortgage lender has already recorded a loss on the property on its books, so it is eager to sell the property to recover as much of its original loan principal as possible. Foreclosed properties in a mortgage lender's inventory are called Real Estate Owned or REO properties.

Most foreclosures are now listed for sale by Realtors on the Multiple Listing Service (MLS). On many MLS systems, the listing is required to indicate whether or not the property is an REO foreclosed property. As a result, your buyer's agent Realtor can quickly locate all REO properties available for sale.

The positive side of working with bank-owned REO properties is that the lender is willing to sell the property as quickly as possible and is not looking to hold out for any extended period of time. In fact, a trend now is for mortgage lenders to list the home for sale well below the current market value and then look for multiple offers to create the equivalent of an auction on the property. Home buyers in these situations should be willing to offer more than the list price when it is set below current market value.

The negative side of buying foreclosures is that many of these properties have been roughed up by the previous owners. Home owners facing foreclosure either skip required maintenance or in some cases strip out anything valuable from the house - from copper pipes to furnaces. In extreme cases, home owners wreck the properties before leaving.

In a short sale, the seller still owns the property and may or may not be in foreclosure. The home owner owes more than the house is worth and is looking to sell the property. The home owner approaches their lender and asks the lender to accept less than the current principal amount of the loan so they can sell the house and avoid foreclosure.

Because short sale owners are trying to get off the hook for tens of thousands of dollars of debt, they have an incentive to help home buyers purchase the property. This also means that unlike in a foreclosure the home seller will make every effort to maintain the quality of the property up until closing.

The down side of short sales is that they take forever. While some Realtors attempt to pre-negotiate short sale approvals with lenders, most mortgage lenders will not look at a short sale request without an actual buyer who has placed an offer on the property. While the short sale process has improved somewhat in the past year, home buyers and sellers are still required to wait anywhere from two to six months just to get an answer from mortgage lenders.

As with all property purchases, home buyers should work with their Realtor to help make sure they know what they are buying.

For a free mortgage pre-approval and an exact rate quote to help you purchase your next home, please email us or call us at 1-877-868-2503.

To see the current mortgage rates, visit our Current Mortgage Rates page.

If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

Our visitors also found the following articles relevent to this topic:

• Mortgage Refinancing FAQs
• Refinance Mortgage Loan
• Four Common Types of Refinance Mortgages