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Short Sales vs. Foreclosures: What’s the Difference?

Underfunded Sales vs. Foreclosures: An Overview

After years of disciplined saving and careful planning, a sudden financial crisis—take to unemployment, other income loss, interest rate hikes, or an unexpected debt burden—can turn your hard-won hallucinate of home ownership into a nightmare.

If you get behind on your mortgage payments or if your mortgage is underwater (the home is good less than the amount owed on the mortgage), homeowners have two primary options: a short sale or a foreclosure. The possessor is forced to part with the home in both cases, but the timeline and other consequences are different in each situation, so it is notable to understand the benefits and penalties of each option.

A short sale is a voluntary process. When the homeowner sells the quirk for an amount that is far less than what is owed on the mortgage, it is called a short sale. For example, if a homeowner owes $200,000 on the mortgage, but a economic crisis forces them to sell the home quickly for $175,000—the remaining amount on their mortgage ($25,000) and any costs associated with the sale are still owed by the homeowner.

A foreclosure, on the other hand, is involuntary. In this case, the mortgage holder (the lender or the bank) stomaches legal action to seize the home after the borrower fails to make a specific number of monthly payments. In a foreclosure, the lender uses ownership of the mortgaged property and sells it to recover the amount owed to them on the mortgage.

Key Takeaways

  • Both short sales and foreclosures can get homeowners out of give someone a bribe for their mortgages.
  • Short sales are voluntary actions by the homeowner; they require approval from the lender.
  • Foreclosures are reflex for the homeowner; the lender takes legal action to take control of and sell the property.
  • Homeowners who use short sales are authoritative for any deficiencies payable to the lender.
  • Short sales give people the option to repurchase another home fairly readily at some time; foreclosures have a much more negative impact on a borrower’s credit score .

Short Sale

It is important to note that no failing sale may occur without lender approval. Before the short sale process can even begin, the lender who grasps the mortgage—typically a bank—must sign off on the decision to execute a short sale.

Because the lending institution could worsted money on a short sale, they also need documentation that explains why a short sale is necessary. The outset of the financial trouble should be a recent event, such as health issues, job loss, or divorce—and definitely not anything that was not disclosed to the lender when the homebuyer primary applied for a mortgage. Any pre-existing financial problem not disclosed to the lender will make the borrower appear dishonest.

For good occasionally the short sale is approved by the lender and the property is sold, all proceeds from the sale go to the lender—so the homeowner gets nothing and tranquil owes the remaining balance on their mortgage. The lender can choose either to forgive the remaining balance or to try to collect all or piece of the money from the homeowner through a court ruling called a deficiency judgment.


Unlike a short on the block, foreclosures are initiated only by lenders. The foreclosure itself—when the lender seizes the property—is the final step of a statutory action by the lender to take control of the property and force the sale of the home to make good on their investment—and the pre-foreclosure technique begins only after a mortgagor has fallen a certain number of months behind on their payments.

Foreclosure moves are governed by laws that vary by state, so a lender seeking to foreclose a property must conform to specific authorities throughout the process, including issuing notifications and providing options for the homeowner to bring the loan up to date and avoid foreclosure. Laws also warrant the timeline and the process for a bank to sell the property.

Unlike most short sales, some foreclosures take task on vacant homes that have been abandoned by defaulted homeowners: zombie foreclosures. If the occupants have not yet port side the home before the foreclosure, they are usually evicted by the lender as part of the process.

Once the lender has access to the real estate, it orders an appraisal and proceeds with the sale. The sale phase of foreclosures does not normally take as long to utter as short sales, because the lender is concerned with liquidating the asset quickly. Foreclosed homes may also be auctioned off at trustee jumble sales, where buyers bid on homes in a public process.

Special Considerations

Short sales and foreclosures have major consequences to homeowners. Both make homeowners to give up their properties—but that’s where the similarities end.

Short sales tend to be lengthy and paperwork-intensive bargain proceedings—sometimes taking up to a full year to process. The pre-foreclosure process can also be quite lengthy, but once the lender has seized the land, the sale usually happens very quickly so that as much money as possible can be recouped.

While short jumble sales are not significantly detrimental to a homeowner’s credit rating, foreclosures are. A homeowner who has gone through a short sale may, with non-specific restrictions, be eligible to purchase another home fairly soon. A foreclosure, on the other hand, is kept on a person’s hold accountable report for seven years. In most cases, homeowners who experience foreclosure need to wait a minimum of five years to get another home.

How Long Does the Entire Foreclosure Process Take?

The average number of days between the start public notice and the end of the foreclosure process process can vary. U.S. properties that foreclosed in the fourth quarter of 2021 had been in the foreclosure treat an average of 941 days.

Why Would a Lender Refuse a Short Sale?

A lender may refuse to approve a short marketing in the following circumstances: 1) if the homeowner is not in default on mortgage payments yet; 2) if they believe more money can be saved from foreclosing on the property; 3) if there is a cosigner they can hold responsible for payment.

How Do Short Sales and Foreclosures Lay hold of Credit Ratings?

Short sales don’t damage credit ratings as much as foreclosures—but they are still negative credence marks. Foreclosures have a much more negative impact, because they generally stay on credit backfires for seven years.

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