If you’re behind on your mortgage, you may be able to avoid foreclosure by selling your home in a short sale. Unlike a foreclosure, a short sale is voluntary and doesn’t require a legal proceeding or public auction. It’s also generally less damaging to your credit than a foreclosure, making it a better choice for your financial health and future homeownership plans.
Key Takeaways
- A short sale lets you sell your house for less than what you owe on your mortgage, but it requires lender approval.
- A foreclosure happens when a lender takes control of a property after a borrower misses multiple payments.
- An individual can purchase a home fairly soon after a short sale, while a foreclosure significantly affects a homeowner’s credit score.
Short Sales in Real Estate vs. Foreclosures
Both short sales and foreclosures result in the loss of your home. However, there are significant differences between the process of a short sale and a foreclosure, as well as the impact each can have on your life.
Understanding these differences will help you make the best decision if you’re struggling to pay your mortgage.
What Is a Short Sale in Real Estate?
A short sale occurs when a lender approves your decision to sell your property for less than what you owe on your mortgage. The primary goal of a short sale is avoiding foreclosure, which can significantly damage your credit score.
The Short-Sale Process
- Write a hardship letter. You must explain your financial difficulties to your lender, such as job loss, divorce, or medical expenses. Be sure to include documentation, such as medical bills or bank statements.
- Put your home on the market. Next, work with a real estate agent to determine an asking price and list your home.
- Submit the offer to your lender. After you have an offer, submit it to your lender with your hardship letter and financial documentation. It can take time for your lender to review the offer and, if necessary, negotiate with the buyer.
- Finalize the deal. If the sale is approved, your lender will receive all proceeds. Often, they’ll forgive the difference between the sale price and the remaining mortgage balance. However, that’s not always the case. If your lender decides to pursue a deficiency judgment, they can require you to pay the difference between the sale price and the mortgage balance.
Reasons to Consider a Short Sale
- Less impact on your credit: A short sale is usually less damaging to your credit than a foreclosure, making it easier to buy another home after the process is complete.
- More control: Short sales are voluntary, whereas foreclosures are forced. If your lender accepts your short sale proposal, you’ll avoid the possibility of your home being put up for auction and eviction.
Drawbacks of a Short Sale
- A short sale requires more work: As a seller, there’s a lot to do in a short sale, including drafting a hardship letter, finding a real estate agent, listing your home, and working with your lender to finalize the deal.
- Approval isn’t guaranteed: These sales can be time-consuming, especially if your lender and buyer don’t agree on the terms of the short sale transaction. You might dedicate substantial time and effort to a sale that ultimately falls through.
What Is a Foreclosure?
A foreclosure occurs when a lender takes control of your home after multiple missed payments, eventually selling it to recoup the unpaid debt.
“Unlike short sales, foreclosures result in the homeowner losing the property without a say in the sale process,” says Julie Mock, an agent with Weichert Realtors – Webb & Associates in Statesboro, Georgia.
The Foreclosure Process
Each state has certain laws around foreclosure proceedings, but here’s how it generally works:
- You miss mortgage payments. After you’ve missed a payment, your lender will contact you. They may issue a warning about potential foreclosure if payments continue to be missed.
- Your lender issues a notice of default. If you fail to make mortgage payments for several months, your lender will send a notice of default and file it with your local recorder’s office.
- Preforeclosure begins. During preforeclosure, you can settle the debt before your home sells by repaying what you owe or through a short sale. In some states, you have the right to reclaim your home before the sale through a legal process known as the right of redemption.
- The home is sold. If you can’t reach an agreement, the lender will sell the house in a public auction or through other means. If you’re still living in the home, you’ll be evicted.
Consequences of a Foreclosure
- Damage to your credit: According to Equifax, your credit score can drop by 100 points (or more) after a foreclosure. Details about your foreclosure can remain on your credit report for seven years.
- Future mortgage challenges: With a foreclosure on your record, there’s a minimum waiting period before you’re eligible for another mortgage. For conventional loans, the period ranges from three to seven years.
- Loss of equity: When your lender repossesses your home, you’ll lose all the hard-earned equity you’ve built.
- Debt: If your home sells for less than what you owe, you may be responsible for the difference (known as the deficiency).
Alternatives to a Foreclosure
- Forbearance: If you’re experiencing short-term financial hardship, you can request mortgage forbearance from your lender. This lets you temporarily pause or reduce your payments and repay them later.
- Repayment plan: You can ask your lender to split a missed payment into multiple installments.
- Loan modification: Sometimes, lenders adjust your loan terms to reduce your monthly payment. They might lower your interest rate, extend the repayment timeline, or both.
- Deed in lieu of foreclosure: If your lender agrees to this arrangement, you’ll transfer home ownership to them, ending your financial responsibilities.
- Short sale: As we’ve covered, a short sale is better for your credit than a foreclosure.
The Impact of Short Sales and Foreclosures on Homeowners
Short sales and foreclosures both involve the loss of your property. While a short sale can still damage your credit score, it usually doesn’t hurt it as much as a foreclosure. Foreclosures have other negative impacts, too, including eviction and lengthy waiting periods before you can get another mortgage.
“Both processes affect credit, but foreclosure is much harder to recover from,” says Eric Bramlett, a Realtor and owner of Bramlett Real Estate in Austin, Texas. “A short sale offers a chance to rebuild sooner, whereas foreclosure can block access to loans or rentals for years.”
The Bottom Line
If you’re facing financial hardship, you may need to make some difficult decisions about the future of your home. Before you settle on a short sale or foreclosure, make sure to weigh both options.
Your credit will take a smaller hit with a short sale, and you’ll avoid the long-term consequences a foreclosure will have on your credit and the ability to own a home again in the future.
Short Sale vs. Foreclosure FAQs
A short sale is less damaging to your credit than a foreclosure. It also lets you avoid eviction and having a lender take possession of your home to sell it at auction or by other means.
A short sale isn’t ideal for anyone, but it allows a seller to avoid foreclosure. A short sale also lets a lender recoup some of their investment without finding a buyer like they would in a foreclosure. A buyer can also benefit from purchasing a short sale because they may be able to get the home for less than market value.
Homeowners who cannot afford their payments may choose a short sale to avoid foreclosure. Sellers whose mortgage balance outweighs their home’s current value might also consider one.
Taylor has more than a decade of experience in professional journalism. During that time, she has written about a variety of topics, including personal finance, real estate, homeownership and home improvement. She has written for publications and brands such as Bankrate, CNET and Angi.
