Short Sale vs. Foreclosure: How Do They Differ?

If you've experienced an unexpected life event or financial expense you may not be able to keep current with your mortgage payments. This could put you at risk of foreclosure. But if you're a homeowner in trouble, you might have heard of a short sale and may wonder whether that's a viable alternative compared to a regular foreclosure sale.

Today, let’s break down short sale transactions vs. foreclosures and explore how they differ, how they are similar, and which you should prioritize as a homeowner at risk of a foreclosed home.

What Is a Short Sale? 

A short sale is a legal process only available to homeowners when they are threatened with the possibility of foreclosing on their homes. With a short sale, a homeowner sells their home for less than the fair market value or less than what they owe on the mortgage. As its name suggests, the seller is “short” of the amount they would ideally receive for the sale.

Why bother with a short sale in the first place? Short selling is a means of recouping some of the costs from a mortgage contract and avoiding major financial repercussions if your home is due to be foreclosed.

Here’s an example of a short sale:

  • A homeowner owes $300,000 on their mortgage but is in danger of foreclosing. They decide to make a short sale of the property.
  • They sell the home for $250,000 in subpar market conditions. They can then use the proceeds of the sale to pay off the majority of the mortgage.
  • They are “short” $50,000, so they’ll have to pay back the lender somehow.

Short sales are essentially negotiation tools homeowners can use to escape a bad financial situation. If a lender accepts the terms of a short sale process, loan debt is settled, and the borrower may not even have to pay the remaining balance they are short on.

But this is heavily dependent on the lender in question. In some cases, the mortgage lender may require the homeowner to pay the deficiency or whatever is left on the mortgage through regular payments, another loan contract, or some other situation within a certain time frame.

Furthermore, lenders must sign off on short home sale agreements before they can take place. The lender has to have documentation explaining why a homeowner may decide to go through with a short sale instead of trying other methods to recoup their costs or settle their debts.

What Is a Foreclosure? 

A foreclosure is a completely different process. Through foreclosure, the lender or owner of a mortgage contract re-possesses the home that acts as collateral on the mortgage contract. They either take full possession of it or sell the home through a public auction to a buyer.

A foreclosure is initiated when homeowners or borrowers default on their loan payments, usually for between three and six months. In some cases, lenders may also initiate foreclosures if borrowers break one or more clauses in a mortgage or loan contract.

The exact foreclosure proceedings for a given property will vary from state to state and depend on the notifications and requirements imposed by the lender.

In most foreclosures, lenders take possession of the property in order to sell the home and recoup most or all of their costs by selling it through an auction. Foreclosures usually take place after the homeowner has left the property, although they may be evicted if they have not done so by the time of the auction date.

What Are the Major Differences? 

As you can see, there are lots of big differences between short sales and foreclosures. The biggest is that a short sale is initiated by the homeowner or borrower, whereas a foreclosure can only be initiated by the lender or overseeing institution for a mortgage contract.

Furthermore, short sales are voluntary. Homeowners can decide to go with a short sale to escape greater financial consequences or to ensure that they don’t have to pay back the lender thousands of dollars after they leave a property. Foreclosures are involuntary on the part of the homeowner, and they could be forced to leave the property against their will under some circumstances.

Other differences include:

  • Timing. A short sale can take up to one year to close from start to finish, and a foreclosure can take just a few months once the foreclosure process has started. Lenders are typically interested in wrapping up foreclosures quickly to lose less money.
  • Damage to credit scores. Short sale properties are not nearly as damaging to homeowners’ credit scores as foreclosures, which are much more damaging and can make it very difficult to acquire another mortgage loan sometime in the future. In contrast, individuals who go use short sales can often get another mortgage pretty quickly or without waiting at all.
  • Paperwork requirements. Because short sales are usually lengthier than foreclosures, they often require much more paperwork and require more documents to be filed with local county offices or other organizations. Foreclosures are speedier and require less paperwork on the part of the homeowner.

What Are the Similarities?

While short sales and foreclosures do have many major differences, they also have some similarities, including:

  • They have a negative burden on the borrower/homeowner’s credit score, financial repetition, tax return, and so on
  • They are both possible resolutions for homeowners who may need to give up a property or mortgage contract because of financial distress

Should You Pursue a Short Sale Instead of a Foreclosure? 

In 99% of cases, short sales are better for borrowers or homeowners than foreclosures. Foreclosures can make it hard for you to get another mortgage in the housing market for up to five years after your first foreclosure, and further foreclosures can make this even worse.

In contrast, a short sale is often seen (from a financial and legal perspective, at any rate) as a viable way to exit a mortgage contract when you are unable to make regular monthly payments. A short sale doesn’t drastically hurt your credit report or your chances of getting another mortgage in the future the way a foreclosure auction does.

Furthermore, many lenders will let you off the hook for any delinquent amount remaining on your mortgage loan if your short sale price doesn't quite cover the full costs of the property. For example, if you make a short sale of your property and owe $10,000 on your mortgage when the profits are counted, your lender may simply allow you out of the contract without requiring you to pay the other $10,000 so that they can move on to other clients.

In this way, short sales could help you escape further financial hardship and bankruptcy if you lose your job, get a divorce, become injured, and have to pay exorbitant medical bills, and so on.

Because of this, it’s always a good idea to talk to your lender if you are in danger of foreclosure and owe a significant amount of money. If you receive a notice of default and are informed that your lender is considering foreclosure, speak to them about short selling the property. Most lenders are more than willing to work with you because they don’t want to go through the lengthy and expensive process of foreclosure if they don’t have to.

Why Do Lenders Agree to Short Sales?

Simply put, because it’s guaranteed income from the property. With a traditional foreclosure, lenders don't have any guarantee that they will recoup their costs. At an auction, the state could sell the property at or above market rate or below market rate. The lender would then have to accept any loss on the home, plus additional costs from setting up the auction and holding the property in the first place.

With a short sale, the lender is guaranteed not to recover their full costs for the property. But they can close out the mortgage contract in a shorter amount of time and cut their costs overall. In a way, short selling is more convenient for lenders, making it an attractive option for both lenders and homeowners.

What Are My Options Aside From Short Selling?

Going through with a short sale or foreclosure aren’t your only two options if you can’t make your mortgage payments.

For example, you can go with an affordable, flexible way to own your home through co-investing with Balance Homes. With our revolutionary and innovative homeownership program, you'll receive cash and pay off your mortgage in exchange for a portion of the home's equity. We may also pay you up to $50,000 in cash to pay off any other outstanding debts you may have in your name.

Under the new arrangement, we become co-investors in your property, and you’ll make manageable monthly payments to us. You can purchase equity back in your home at any point. 

Co-investing with a third party offers a new and innovative way to retain control of your home without having to go through foreclosure or significantly reduce your credit score. You can contact us today or check out our website for more information.

All of Your Available Options

At the end of the day, short sales are viable means for homeowners to recover some of the costs of their mortgages without taking on additional loans, going to court with an attorney, or getting in trouble with the bank.

However, a short sale is only possible if your lender approves; be sure to talk to them ASAP if you are in danger of foreclosure or know you won’t be able to make your monthly payments over the next few months.

If your home’s lender insists on foreclosure, don’t forget to contact Balance Home for a possible co-investment option. Foreclosure can be stressful, but it’s not unbeatable. With Balance Homes on your side, you can get through this trying time and come out on the other side with your credit score intact. Contact us today. 


Short Sale (Real Estate) Definition | Investopedia

Short Sales vs. Foreclosures: What's the Difference? | Investopedia

What Is Foreclosure? - Foreclosure Center | Zillow