Which Is Better For A Lender: A Short Sale Or Foreclosure?

Short sales and foreclosures both occur when a homeowner can no longer make their loan payments to their mortgage lender. In mortgage default management, lenders are sometimes met with a choice: short sale vs foreclosure, and we can help you decide which is the best option.

A mortgage short sale occurs when a homeowner attempts to sell a home for a lesser amount than what is owed to the lender, and the lender agrees to forgive the outstanding balance and not pursue them for foreclosure.

A mortgage foreclosure, on the other hand, is a much more tedious, stressful, and costly option for mortgage default management. A foreclosure requires the lender to seize the home from their borrower after they fail to make payments. This option entails pursuing legal action.

Foreclosures are always initiated by the lender as a part of their mortgage default management. A short sale can be initiated by the homeowner or borrower to avoid foreclosure and sell the home, and partially repay their debts quickly and efficiently.

When the homeowner makes a short sale offer, the lender must decide to either accept or decline and pursue a mortgage foreclosure going forward. If a borrower requests permission for a mortgage short sale, it is the better option for the lender.

What's The Difference Between A Short Sale & Foreclosure?

Short sales and foreclosures happen when a homeowner can no longer make payments on their mortgage loan. Homeowners that find themselves in financial distress and are unable to make their mortgage payments don't have to wait for the bank to foreclose and seize their property.

To avoid dealing with a foreclosure, homeowners can ask their lender for a mortgage short sale. A mortgage short sale is a mutually beneficial option for mortgage default management. A mortgage short sale happens when a homeowner can't stay on top of their payments, realizes that they might go into foreclosure, and requests permission to do a short sale from their lender.

A short sale is fairly similar to a regular home sale. The homeowner files a letter asking for permission based on their current finances and why they are unable to make their payments in full.

The borrower explains why a mortgage short sale makes sense for their unique circumstances and why the lender should agree to it for the amount offered. Then everything is up to the lender. As a lender, you can agree to do a mortgage short sale without needing to agree on the price.

You can still negotiate on price and offer amount going forward, which is why mortgage short sales are a great option for lenders. A mortgage short sale and mortgage foreclosure are different in three main ways: timing, financial impact, and sellers involvement. We'll explain each of these differences in more detail below:

• Timing – One of the main differences between a mortgage short sale and mortgage foreclosure is timing. Short sales, like the name implies, can be faster and quicker because they do not involve going to court. However, short sales do require a lot of paperwork which the lender can process and handle at their preferred pace.
• Financial Impact – In the discussion between short sale vs foreclosure, short sales stand out as the better option since they are cheaper than foreclosure. With a mortgage short sale, you don't have to go to court, meaning no legal or court fees, which are usually absorbed by the lender. Choosing a short sale helps save a considerable amount of money.
• Seller's Involvement – One of the reasons why short sales are a preferable option for lenders is because the lender gets to approve and accept offers. While the seller will still have some involvement, it is much easier for the lender to navigate compared to a foreclosure.

These stand out as the main three reasons why a mortgage short sale is the best option for a lender. Lenders that opt for a short sale over a foreclosure can take advantage of saving time, reducing costs, and minimizing back and forth with the seller.

Why Should Lenders Opt For Short Sale Over A Foreclosure?

Lenders should opt for a short sale over a foreclosure for several reasons. While it might not seem desirable to accept less money that you are owed, a short sale can be much more beneficial than a foreclosure in the long run.

Here are some of the reasons why lenders should opt for a short sale instead of a foreclosure:

• It can save you money – It might seem counterintuitive that accepting less money than you are owed on a loan will save you money, but it is true. Foreclosures require court fees, legal fees, and other additional costs. With a short sale, lenders can avoid these costs that can really add up.
• It is much less stressful – Because a foreclosure requires that lenders open a court case, foreclosures can be extremely stressful for both the borrower and lender. Opting for a short sale is less stressful since you don't have to go back and forth with the borrower, demanding documents, and handling legal proceedings.
• It offers untampered property value – When a property goes into foreclosure, it often depreciates in value. This means lenders lose money. With a mortgage short sale, the original property value is at least partially retained, instead of being left up to chance to see what the highest bidder will offer.
• It can prevent a foreclosure – Accepting a short sale is a great way to avoid foreclosure. If your borrower offers you a short sale offer, accepting it can prevent you from having to go into foreclosure in the future. Short sales stand out as a great option for lenders because you can actively avoid foreclosure.
• It can help you in the long run – When it comes to short sale vs foreclosure, lenders should opt for a short sale due to its long run benefits. We know that it might seem risky to accept an offer for less than you are owed, but short sales are a great option for the lender to face lesser loss compared to a foreclosure.

Conclusion: Short Sale Vs Foreclosure – Which Is Better For A Lender?

A short sale mortgage default process is a win-win for both the lender and borrower. Short sales stand out as the best option for lenders to take an active approach to mortgage default management and minimize loss.

Lenders that take advantage of short sales can prevent foreclosure, which is more beneficial in the long run. If you are torn between short sale vs foreclosure in mortgage default management, we'd recommend a short sale.

Rely Services is a business process outsourcing- BPO company that specializes in Mortgage BPO and mortgage Loan Processing Services. To learn more about if short sale vs foreclosure would be the best option for you as a lender, Contact Us.