How does a short sale differ from a foreclosure?

A short sale is a real estate transaction in which the seller sells their property for less than the amount owed on the mortgage, and this requires approval from the lender for the sale to proceed. This situation often arises when the homeowner is facing financial difficulties and cannot afford to continue making mortgage payments, yet wishes to avoid the lengthy and damaging process of foreclosure.

In a short sale, the lender agrees to accept a reduced payoff on the mortgage because it is often more financially beneficial for them to allow a sale rather than going through the full foreclosure process, which can be costly and time-consuming. This distinction is crucial because the lender's approval is mandatory, and sellers must provide evidence of financial hardship to initiate a short sale.

On the other hand, foreclosure is a legal process initiated by a lender when a borrower fails to make mortgage payments. In this case, the lender takes ownership of the property after the necessary legal proceedings, and it does not involve the agreement of the seller to sell the property.

Understanding this difference is essential for both buyers and sellers in the real estate market, as it impacts their rights, responsibilities, and the potential financial outcomes of the transactions.