Since I've been asked this a couple times in the last week, I'm going to take my first blog post to explain the difference between a short sale and a foreclosure. A foreclosure is when, once a homeowner defaults on their mortgage, the bank takes possession of the property and sells it to pay off the debt owed. A short sale is another option to pay off a defaulted mortgage.
In a short sale situation, the bank or lender has agreed to accept less than what is owed on the property. When an offer is made, it must be presented to the lender for acceptance. Why would a bank decide to do a short sale over a foreclosure? Foreclosures cost money. Legal fees, title cleanup, and marketing fees stack up and can actually lower the total take home for the lender.
The difference, credit wise, is that with a short sale, you are eligible to apply for a mortgage backed by Freddie Mac or Fannie Mae in a short period of time. With a foreclosure, getting a mortgage short term is difficult.
Hope this clears up some confusion with short sales and foreclosures!
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