The terms “foreclosure” and “short sale” both refer to situations that arise when a homeowner borrows capital from any bank in order to purchase a home, and in due course of time is unable to pay off the mortgage. To salvage such a situation, a short sale or foreclosure is done.

Selling a piece of real estate, which results in generation of income that is less than the amount outstanding on the property, is called a “short sale.” This kind of a transaction on the property can be initiated only with full consensus of the lender, or the banks/financing institutions mostly. In such cases, a lender often stands to lose a great deal of money.

The process of a short sale, thus, commences after signing off the requisite set of documents by the bank authorities and the borrower, who has been unable to honor the mortgage payments. The defaulting borrower must justify his claim to short sell the property to the bank by providing all the requisite paperwork, which justifies such a sale.

Any short sale can take place once the lender is in concurrence only. Without the lender’s approval, a short sale cannot be executed. The lender/bank takes a definite period of time that can range from 90 to 365 days to arrive at a decision regarding the short sale of a property.

Mostly in a short-sale case, the owner of the house still occupies the property in question. The interested buyer of the property begins negotiations with the owner/borrower first and then has to conduct a second round of negotiations with the lender/bank. This process is quiet, long winding, and consumes a lot of time and effort by means of copious paperwork that is required to be done. However, it is still considered to be much better than a foreclosure, as it doesn’t leave a bad record on the credit scoring of an individual. The defaulting borrower can post the short sale and then immediately apply for a new or fresh house loan. The lender is also saved from bearing the hefty foreclosure fees.

Additionally, the borrower is not evicted from the premises by the bank while the process of the short sale is in progress. The borrower can retain the premises until a suitable/interested buyer for the property is found.

A foreclosure, on the other hand, is a case where under similar circumstances of failure to repay a mortgage by the borrower results in eviction of the borrower from the house and the lender or bank takes possession of the property.

Certain laws mandate the bank to seek an approval from the court prior to evicting the defaulting borrower from the house, but mostly the banks take possession of the property first and then try to liquidate the property.

The process followed by the bank in the case of a foreclosure is as per the mortgage contract/agreement signed by the borrower at the time of taking the loan. A month after the borrower misses the mortgage payment, the default period begins and the bank notifies the borrower. After the grace period during which the mortgage remains delinquent, the borrower is given an opportunity to repay the outstanding loan and continue. However, with the passage of time, the difficulty in repaying the loan increases as banks leap to adding late payment fees to the outstanding balance.

The banks/lenders then initiate the foreclosure procedure. The foreclosure laws are applicable as enforced by the state, and banks are required to follow those laws while proceeding with a foreclosure of a loan. The first attempt by the bank in such a case is advising the borrower on how a foreclosure can be avoided by the borrower and initiating a sale of the property.

Once foreclosure is approved, then the borrower is evicted from the property; and sale of the property commences, with the property being awarded to the highest bidder.

But a foreclosure appears on the borrower’s credit report, which means that a period of at least five years must pass before the borrower can apply for a home loan again.