Short Sale vs Foreclosure

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Short Sale vs foreclosure

You may have encountered challenging financial difficulties that caused you to miss mortgage payments. Now you have to consider possible solutions like short sale and foreclosure. Selling to a cash buyer is another option.

A short sale is when a homeowner sells their house for less than the amount they owe on their mortgage. Foreclosures happen when someone can’t make payments on their home loan. The lender, or bank, will take back the home and sell it to get their money back.

A short sale and foreclosure can feel overwhelming. To help you navigate this trying situation, we’ve created a guide with helpful strategies, tips, and other options besides a short sale and foreclosure. Keep reading to learn more!

Your Guide To Short Sale vs Foreclosure

Understanding the difference between a short sale and foreclosure can be confusing. Both options can be viable solutions, but there are some key differences that you should be aware of before making any decisions. We’ll explore both short sales and foreclosures so you can decide which option is best for you.

Short sale

A short sale is a real estate transaction in which the seller’s mortgage lender agrees to accept less than the total amount owed on the loan. Here are some critical points about short sales:

  • The seller must be in financial distress and unable to pay off their mortgage debt.
  • The lender must agree to accept less than the total amount owed on the loan.
  • The proceeds from the sale are used to pay off the remaining debt.
  • Short sales can help avoid foreclosure but may hurt credit scores.
  • Short sales can take several months or longer, depending on the lender’s approval process.
A foreclosure notice with a brown folder and keys on top of it


Foreclosure is a legal process that allows lenders to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Here are some critical points about foreclosure:

  • It is a legal process initiated by lenders when borrowers fail to pay their loans.
  • The lender sends out a notice of default, which starts pre-foreclosure.
  • The lender takes ownership of the property and sells it to recoup the money they are owed.
  • Foreclosures can be either judicial or non-judicial, depending on state law and the type of loan involved.
  • Homeowners can avoid foreclosure by working with their lender to devise an alternative payment plan or refinancing their loan.

Judicial vs. Nonjudicial

Regarding foreclosures, there are two main types: judicial and non-judicial. A judicial foreclosure means the lender goes to court for a judgment to foreclose on your home. In contrast, a non-judicial foreclosure allows the lienholder to sell the property without filing a lawsuit.

The primary difference between judicial and non-judicial foreclosures is that the latter does not involve court proceedings. Judicial foreclosures can take longer and be more expensive for the lender than non-judicial foreclosures, which often last just a few months or less.

In a judicial state, the lender has to file a lawsuit to foreclose, while in a non-judicial state, the foreclosure process does not have to go through the court system.

What is a Short Sale

A short sale is a real estate transaction in which the homeowner sells their property for less than the amount they owe on their mortgage. This type of sale is usually a sign of financial distress and is used to avoid foreclosure. The lender agrees to accept the proceeds from the transaction as full payment, even if it falls short of the total amount owed.

Short Sale Timeline

A short sale is when the lender agrees to sell a property for less than the outstanding mortgage balance against it. The short sale process typically looks like this:

  • Homeowner initiates the process by proving the extent of their financial trouble
  • Research the housing market
  • Market your home (Realtor, real estate agent, FSBO)
  • The field offers on the property
  • Have a home inspection done
  • Negotiate with your lender and agree on terms
  • Receive approval from your lender and close on the sale
A beautiful house with a red and white 'Short sale - For sale' sign

Differences Between Short Sale and Foreclosure

A short sale occurs when a mortgage lender allows the homeowner to sell their house for less than their mortgage debt, while a foreclosed home is seized and put up for sale by the mortgage lender.

Here are six key differences between a short sale and foreclosure:

  1. Short sales are voluntary for the seller, while foreclosures are involuntary.
  2. A foreclosure is more damaging to a credit report than a short sale.
  3. With a short sale home, the lender does not evict the homeowner, but with a foreclosure, they do.
  4. Buyers may get better deals on foreclosed properties than short sales as lenders may be more willing to negotiate on home values to move them quickly off their books.
  5. Due to negotiations with multiple parties involved (lender, buyer, and seller), short sale work typically takes longer than foreclosure auctions.
  6. Foreclosure properties may have liens or judgments attached that must be cleared before closing, whereas this is not an issue with short sales as long as all parties agree on settlement terms before the closing date.
A lender argues with two homeowners after refusing to let them short-sale their property

Why Would a Lender Refuse a Short Sale?

For short sales, lenders may refuse a request for various reasons. Here are some of the most common:

  • Sale price is too low: Lenders will always ask for a total market value or close to it. If the offer is too far below that, they may reject it.
  • Seller doesn’t qualify: The lender will look at both parties involved in the sale and ensure they meet all requirements before approving the short sale.
  • Application is incomplete: All paperwork must be completed correctly and entirely for the lender to consider the short sale.
  • Loan has already been sold: If the mortgage loan has been sold to another entity, then that entity must approve the short sale before it can go through.

Do Short Sales and Foreclosures Affect Credit Ratings

Doing a short sale or foreclosure can considerably impact your credit score. Understanding how these actions affect your credit rating is essential so you can make the best decision for your financial future.

How Does a Short Sale Affect Credit Ratings?

When a lender agrees to a short sale, the lender will report this to the three major credit bureaus (Equifax, Experian, and TransUnion) as “not paid as agreed.” This will cause your credit score to drop by 100-150 points, depending on where you started. The higher your score was before the short sale, the more points it will fall.

A short sale transaction may remain in your credit reports for up to seven years, similar to other negative items such as bankruptcies or foreclosures. This means that it could continue to affect your credit score for some time after the event.

How Does a Foreclosure Affect Credit Ratings?

Foreclosure proceedings can have a significant negative impact on credit ratings. The number of points deducted from your credit score will depend on the severity of the foreclosure and other factors, such as your current credit score. Generally, a foreclosure can remain on your credit report for up to seven years, challenging to obtain new loans or lines of credit.

Save Your Credit Rating

Having a negative credit rating can be challenging to find yourself in. Fortunately, there are ways to avoid it. One way is to sell your home to a cash buyer. This can help you avoid the stress of dealing with lenders and loan applications and the potential for your credit score to be negatively impacted by missed payments or other factors.

When selling your home to a cash buyer, it’s essential to research and ensures that the buyer is reputable and reliable. You’ll also want to make sure that all of the paperwork is completed correctly so that you won’t have any issues down the line.


When selling a home, short sale and foreclosure are two options that you can consider. A short-sale property can offer freedom from the remaining balance on your home. Foreclosure is when the bank seizes the property and puts it up for sale, while a short sale occurs when lenders allow the borrower to sell the house for less than what is owed on the mortgage.

Ultimately, sellers must weigh their options carefully and decide based on their financial situation.

Selling to a cash buyer or real estate investor can be an attractive option for homeowners looking to avoid a short sale or foreclosure. The cash can help you buy a new home. Here are some of the benefits of selling to a cash buyer:

  • Quick and hassle-free transaction: Selling to a cash buyer is usually much faster than going through the traditional home selling process, as there is no need to wait for financing or inspections.
  • No repairs needed: Cash buyers typically don’t require any repairs or renovations before the home purchase, so you won’t have to worry about making costly improvements.
  • Avoid foreclosure: By selling your home quickly, you can avoid having your home go into foreclosure.
  • Avoid short sale: Selling your home for cash will help you avoid going through the lengthy and often complicated process of a short sale.

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