March 13, 2023

Short Sale vs Foreclosure [What is a Short Sale vs Foreclosure?]

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A seller can choose a short sale but not foreclosure... learn the specifics of short sales and foreclosures below. If you need a fast home sale, fill out the form to get started on your free cash offer today!

Short Sale vs Foreclosure

Short Sale vs Foreclosure

Homeownership can be a total nightmare if life throws you a financial curveball. You might fall behind on your mortgage payments or find your property underwater, which can eventually lead to losing a dream home. When this happens, you are faced with two options– foreclosure and short sale. 

Foreclosure is an involuntary process that occurs when you miss your mortgage payments and the lender is given the right to auction your property. Meanwhile, a short sale is a voluntary process wherein you sell your home for less than what you owe in the mortgage payment. This has to be approved by your lender since they have the choice to forgive the balance or ask you to pay for it after the sale.

Want to learn more about the difference between foreclosures and short sales? Check out the rest of this blog!

What is a Short Sale vs Foreclosure?

What is a Short Sale vs Foreclosure?

A homeowner who finds himself burdened by a distressed property can lose his home to foreclosure or a short sale. Although both can affect one's credit report, foreclosures differ greatly from a short sale. To understand short sales and foreclosures better, let us differentiate them.

Short Sale Process

A short sale is the process of selling a property for less than the outstanding mortgage due to a financial crisis. The lender should agree to this sale as they will get all the proceeds after closing. They may also forgive the difference or require the borrower to pay for it by getting a deficiency judgment

For instance, if the homeowner owes $250,000 and the home's market value is only $225,000, the $25,000 difference when the house is sold in today's market can either be forgiven or still be claimed by the lender.

While it may seem that the lender is at a loss, especially when they decide to forgive the remaining mortgage balance, this is preferred over foreclosure. 

Foreclosures can be very expensive and may cause more financial burdens to the lender as the process progresses. Meanwhile, a short sale transaction occurs in the interest of both lenders and homeowners. Although the home is sold at a lower price, everyone gets what they want during closing.

Foreclosure Process

If you have a mortgage loan, foreclosure is probably the scariest word for you. The foreclosure process occurs when a property is seized by the bank due to a homeowner's failure to pay his monthly mortgage payments.

Remember that a mortgage contract puts a lien on a house, so when the mortgage holder fails to pay, lenders repossess the property and sell it in a foreclosure auction to recover the mortgage owed.

Foreclosures won't do any good to the lender and the homeowner. The former would take a great financial loss because the ongoing costs of foreclosure aren't cheap, while the homeowner's home would just be one of the foreclosure properties the bank owns.

Pros and Cons of Short Sales

Knowing what a short sale is won't really help you decide if it's the best way to pay off your mortgage loan. You have to look at its pros and cons and weigh them carefully before deciding.

Pros of Short Sale

Helps Avoid Foreclosure

Pros and Cons of Short Sales

The main advantage of when a homeowner sells through a short sale is avoiding the foreclosure stage. This means you will be free from all or some of your mortgage obligations even though your house is underwater.

Saves Time

Foreclosures generally require a long process. It can take months to years, depending on how fast the court can give its jurisdiction since they are handling the case of many foreclosure properties.

If you sell your home on the housing market through a short sale, you can save both time and energy. Short sale properties are also sold as-is, skipping potential renovation costs.

Credit Rating Recovery is Faster

Although a pre-approved short sale can impact your credit report, you can recover from it faster than foreclosure. You will see an improvement in your credit score after two years of selling the short sale property, and you'll be allowed to get financing approval for a new home.

Lender Covers Fees

During a pre-approved short sale, some lenders are kind enough to cover real estate agent commissions and closing costs since they are aware of the homeowner's financial situation. 

No Need to Move Out Immediately

Until the short sale closes, you can stay in the property. This isn't possible during foreclosure since the house needs to be vacated before it can be sold. This is similar to municipal auctions, where the owner should leave the property. The owner is still responsible to pay for the taxes owed.

The Lender Covers Relocation

If you qualify for relocation assistance during a short sale, the lender will provide you with a certain amount that can cover moving fees, a security deposit to a new apartment, etc.

Cons of Short Sale

Home and Equity Loss

If you opt for a short sale to beat foreclosure, you can potentially lose your home's equity, if there is any. Also, you face the tragedy of home loss that can put you in a deeper financial crisis, especially if the lender gives a deficiency judgment.

If you don't have enough money for the down payment of a smaller home, you can check out renting a home until you're back on your feet.

More Parties are Involved

In a short sale, the homeowner and his real estate agent are not the only people involved. The lender himself, as well as the servicing company that runs the short sale negotiations with the lender, will be in the picture. This can make things more difficult and energy-consuming for the homeowner.

More Complicated Due to Multiple Liens or Mortgages

Short sales tend to be complicated. If there are multiple liens on the property, all the parties should approve the sale. These lien holders often ask to be guaranteed a portion of the sale's proceeds before they allow the short sale's approval. Otherwise, they would push the foreclosure process to commence.

Deficiency Judgment

Depending on your mortgage lender, the balance on the short sale can be forgiven or not. If they did not forgive the mortgage balance, you would still have to pay for a deficiency judgment. Your lender can sue you in court in order to collect the money you still owe them.

Relocation Payment is Taxed

Assuming you were able to submit all the requirements to be granted relocation relief, the amount you'll receive can be taxed. In other words, you won't really get the full amount you initially thought you'd get when you opt for a short sale.

Pros and Cons of Foreclosures

Pros of Foreclosure

Negotiation of Loan Terms

Pros and Cons of Foreclosures

Mortgage lenders would rather work with homeowners than lose money in a foreclosure. This means they'll offer to change your mortgage terms or come up with a refinancing agreement so you can pay them. Negotiation of loan terms won't really occur unless your house is about to be foreclosed.

New Beginning

It can be difficult to see a silver lining when a property is foreclosed, but there actually is— the promise of a new beginning. You could move to a quiet neighborhood or one close to your relatives. You can find a home near the city where you can access public transportation. You can also build new relationships and gain new friends where you are moving.

Save Up Money

Realistically speaking, when the foreclosure process begins, paying a month or two in your remaining balance won't stop it unless you pay the whole amount you owe. If you're still going to lose your home in the end, you can stop making monthly payments when the process begins and just save your money for future use.

Cons of Foreclosure

Loss of a Home

Similar to a short sale, the loss of a home is the hardest part of going through foreclosure. Although you can potentially buy it back through the right of redemption, the chances are very slim given the financial hardship you are in. 

Damage to Credit

Foreclosure can cause your credit score to drop by 100 points or more. It will stay on your credit report for no less than seven to ten years. In other words, you may find it difficult to get a new home loan if you go through foreclosure.

Short Sale: Frequently Asked Questions

What's the Most Common Alternative to a Short Sale?

The most common alternative to a short sale is getting a deed in lieu of foreclosure. This is a transaction wherein the homeowner voluntarily transfers the ownership of the property to the lender so they would be released from the mortgage. This helps the homeowner avoid putting the house for sale so real estate agents won't have to be involved. 

Aside from getting a deed in lieu of foreclosure, some common alternatives to a short sale are modifying, refinancing, or reinstating the loan, negotiating forbearance, renting the property, or leasing to sell.

Can a Buyer Walk Away From a Short Sale?

Yes. A buyer can walk away from a short sale if the home seller or their real estate agent fails to approve or respond to the offer during the amount of time given in the short sale addendum. This is around 30 days up to one year and is most common when short sale homes are marketed through a traditional sale.

Moreover, the potential new owner can back out even if the short sale process is approved. This is if there are issues found on the home inspection that wasn't disclosed, if the seller did something against the contract, or some other problems.

This rarely happens during a cash transaction since cash buyers purchase real estate owned (REO) properties no matter their condition (typically below market value).

Can a Seller Back Out of a Short Sale?

Yes, although less common than buyers backing out, home sellers can back out of short sales, too. This is permitted if the seller wants to cancel the listing and the listing agent agrees. In some cases, the seller can also back out if he receives a higher offer or changes his mind and would rather proceed to foreclosure.

How Often Do Short Sales Fall Through?

Short sales falling through is not uncommon on the real estate market. In fact, only 40% of short sales reach the closing table. This happens when the house has a second mortgage, too many tax liens, or if there are issues between the seller and buyer. It is also possible for the lender to prevent the sale from closing.

How Long Can a Short Sale Stay on the Market?

Ideally, short sales should only stay on the real estate market for less than 30 days so the missed payments owed can be paid right away. However, mortgage lenders allow short sales to be held for varying times, so ask your lender how much time you have to list your home.

Why Would a Lender Refuse a Short Sale?

A lender may refuse a short sale in the real estate market for two common reasons. First is if they are in a deed of trust state which means there are lower foreclosure costs. Second is if the property has a lot of potential and many qualified home buyers are expected to take an interest in the foreclosed home at market value during an auction. The latter would satisfy their goal to get as much money as possible.

Foreclosure: Frequently Asked Questions

Who Owns the Foreclosed Property?

Technically, the legal ownership of a foreclosed home is transferred to the lender. These foreclosed properties are tagged as real estate owned (REO) or bank owned. However, the name of the homeowner stays on the title until the redemption period ends, even though the REO property is no longer theirs.

Who Pays Foreclosure Costs?

In most cases, the lender shoulders fees for foreclosure properties. This is the main reason why lenders would rather work with the buyer to avoid foreclosure through the short sale process, refinancing, and some other options.

Some of the foreclosure costs included when a bank forecloses on a property are legal and attorney fees, title search, property preservation fees, private process server, and pre-acceleration late charges.

What are the Documents Involved in a Foreclosure?

The documents involved in a real estate foreclosure are the original loan documents, complaint for foreclosure, a notice of default, lender documentation, a notice of lis pendens, property appraisal, and summons to the court.

How Long Does a Foreclosure Take?

The real estate foreclosure process can take six months to a year, depending on the circumstances. Judicial foreclosures are a lot longer than non-judicial foreclosures due to court involvement. Moreover, state laws and some other factors can impact the transfer of ownership of foreclosed homes or REO properties.

Key Takeaways: Short Sale vs Foreclosure

Short sales and foreclosures are both stressful for a homeowner because it ends the same way— the loss of a home. Nevertheless, if you are faced with only these two options, compare the pros and cons for your specific situation. A short sale will have a less negative impact on your credit report and you'll be able to apply for a mortgage loan a year or two after the sale.

If you need help selling your home to avoid foreclosure or even a short sale, Sell My House Fast is here to help! We'll give you a fair cash offer for your property and close as fast as possible. We'll also cover closing costs for you!

Fill out our form below or give us a call at (844) 207-0788 for a quick sale.

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catherine mack
Author: Andy Kolodgie

Andy Kolodgie is an experienced real estate investor with a network that expands nationwide. As owner of Sell My House Fast, Andy’s goal is to provide home sellers with more options to their real estate problems than a traditional home sale. 

He’s been featured on multiple publications including Amazon, Yahoo Finance, MSN, HomeLight,, Apartment Therapy,, LegalZoom, Zolo, and

Sell My House Fast has been a cash home buying company since 1999. We buy houses nationwide! At Sell My House Fast, we offer cash for houses and connect sellers with local buyers. If you want to sell your house for cash, fill out our short form to get fair all cash offers for your house!

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