Short Sale vs. Foreclosure: Which is the Better Option?

Losing your home to foreclosure due to an inability to keep up with your monthly mortgage payments is one of life’s most unpleasant experiences. It is also an event that keeps on affecting you long after your home is history by devastating your credit score. Regrettably, most people cannot be 100% sure that they will remain safe from foreclosure because they can’t foresee the unexpected. Occurrences such as serious illness, a major accident, divorce or job loss can happen to anyone. So it’s a good idea to understand the available alternatives should the worst occur.

Of all available options, foreclosure is the worst

The inevitable result of a foreclosure is the lender taking your house. Not only will you lose your house, but the lender can get a judgment against you for the arrearages you owe plus his costs for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.

Consider a short sale when foreclosure seems inevitable

A short sale is a popular option for homeowners mired down with financial problems. In this case, you would sell your home for less than what you owe your lender; the biggest problem you will face is getting your lender to agree to a short sale. In many situations, they will not. Experts advise pursuing this option the minute you realize that you are falling behind in your payments and most likely won’t be able to catch up. The longer you wait and the greater the amount you are in arrears, the less likely it becomes that your lender will even be willing to discuss a short sale.

Short sales have disadvantages too

While a short sale will save you from foreclosure, it will also have a negative effect on your credit score, frequently lowering it by as much as 200 points. This can be overcome more quickly than the black mark of a foreclosure, especially if you manage to retain one or two credit cards and keep them current. Perhaps equally distressing, the Internal Revenue Service frequently deemed the difference between the mortgage balance and the amount realized from the short sale to be taxable as income despite the fact that the debtor never saw a dime of it. There is new federal legislation called the Mortgage Forgiveness Debt Relief Act 0f 2007 that just went into effect on January 1st, 2008. The new act essentially eliminates this problem.

Almost any option is better than foreclosure

Simply stated, do everything you can before foreclosure occurs and do it as quickly as humanly possible. Don’t sit back and keep thinking, “What can I do?” Instead, consider that short sale and check with your lender before your options become more limited.

Best Tip I Can Give You: Don’t Do This Alone

I successfully short sold my house, and the single biggest reason was my real estate agent. Having someone who could work on my behalf was incredible. Facing foreclosure is a scary thing, I know, I was about a month away from losing my home before I got my short sale done.

Don’t just get any real estate agent to help you! My agent had lots of short sale experience, and it made all the difference. He knew who to talk to, when to talk to them, and how to handle all the paperwork to get the deal done.

You Need An Experienced Short Sale Agent!

From my blog here I’ve developed an extensive network of real estate agents that have short sale experience. If you’d like a referral, fill out the form below and I’ll have someone available in your area to help with your short sale ASAP.

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  • Andrew Petoulaski

    If you are waiting on your clients to express their financial woes to you, about how they are on the verge of going into foreclosure, plan on waiting for a long time. It's not likely that those clients who you helped get a home, will call you when they are on the verge of foreclosure. It's nothing against the broker, it's just that many homeowners may not be necessarily thinking about the other possibilities and alternatives. They probably do not view you as a possible help to their problem. On the other hand, the question is, do you as a mortgage broker realize that you have the ability to help? Your clients who are on the verge of foreclosure may not need to foreclose.

  • Ellen Plante

    I think this is a great article and one that I will share with clients that are on the verge of losing their home. This economy is affecting all of us one way or another and any help we can give the public is better than none. We are professionals in our field and we should be there to give good, sound advice during the good times as well as the tough. I would like to be on your referral list so please feel free to contact me if you need an agent from St. George, UT.

  • Sarah Becker

    I agree wholeheartedly with Ellen’s comments. Clients need the clear facts as presented in this article and they need to know that, as realtors, we are on their side. As professionals, we should offer our expertise freely to those in need. Educating clients is our responsibility right now. Distressed property owners should not have to worry about being taken advantage of in their time of need. That’s why my team is reaching out to homeowners on the verge of foreclosure offering a free initial consultation, and, if we can help them, our follow-on services are absolutely free. If you or someone you know needs a dependable, honest real estate agent in Northern California, please contact us.

  • Bobbi Mechler

    While the housing market is SLOWLY recovering here in South Florida, there are so many people that are “underwater” in terms of their home’s value vs. their mortgage balance. Foreclosure is certainly the worst option and should be avoided whenever possible. If you are in a position where you can not continue to stay in your home, consider offering it for sale using the Short Sale alternative. Our group has had much experience in helping owners who are in this position and we would be happy to offer a free consultation. If you are in the South Florida area, please feel free to contact us.

  • Shirley Barnett

    I am looking for someone good to help me with a short sale in Aurora, IL. We are moving to Minnesota, and it looks like we will be having to sell our home for 50,000 less than we paid for it 3 1/2 years ago. If you know of some one who can help us out let me know, Thanks, Shirley

  • Linda

    Is foreclosure necessarily the worst option? From what I’ve read about it, a shortsale can impact your credit score just as badly as a foreclosure, plus you may be liable to reimburse the difference between the sale and the mortgage to the bank- something that won’t happen if the home is repossesed by the bank and sold by them.

  • TC

    I believe a short sale is just a better way out than the stigma that comes with being foreclosed upon. A short sale could give a bank the same cash back as a foreclosure would in may cases.
    Banks are hung up on the old believe system. Take the house back~ and sell if for all we can get or what the mortgage is worth~ But alas, it is not worth more than the short sale “most of the time”.


  • Melanie T. Bozeman

    What a great article and very helpful information for sellers in need. I can say from my experience, short sales are a better choice than forclosure. In our current economic situation we all have to stick together and tough it our. If you are in need of a honest, trustworthy, Realtor in the Ocala, Marion County FL area let me know. I would be happy to discuss the process with you. We are all in this “boat” together, lets find a solution for us all. Melanie T. Bozeman 352-804-0550.

  • Alex Banester

    Your information regarding foreclose is incorrect for persons living in California. Banks cannot seek a deficiency judgment for a money purchase loan, which most loans are. See Cal Civil Code section 580(b). Thus, it may be better to foreclose than short sale.

  • Mike

    Is foreclosure necessarily the worst option? From what I’ve read about it, a shortsale can impact your credit score just as badly as a foreclosure, plus you may be liable to reimburse the difference between the sale and the mortgage to the bank- something that won’t happen if the home is repossesed by the bank and sold by them.


    Depending on the state you live in, the type of mortgage it was, investor/lender ratios and the amount of the differnce between what the bank sold your property for vs what your mortgage was, may result in a deficiency judgement.

    To put it simple:
    A short sale – puts in a negotiable position
    A foreclosure – takes that position away

    If you plan on purchasing a home in the near (er) future, a short sale is to your benefit.

    Hope this helps.

    Mike Luzzo

  • Bren

    We have a house in AZ and live in another state. The AZ house is the collateral for the loan and we are waiting approval on a short sale. Will the short sale satisfy the mortgage company or can they try to collect more? Or is giving the mortgage company the keys the better way to go?

  • Chad Huebener

    Thanks for this article. We do a lot of short sales in the south Twin Cities suburbs, but still struggle with getting people to understand that they cannot “just do a short sale” a month before they plan to be out of the house. We are going to share this with our prospects. Thanks!

    Chad & Sara Huebener
    Coldwell Banker Burnet

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  • Pam

    I am looking at foreclosure vs. short sale. My mother is considering buying the house for its current value, leaving us about $70,000 short from the amount we would still owe (one primary and two equity loans). She would then rent the house back to us so that we would be able to avoid the foreclosure and moving. Are lenders going to be more reluctant to agree to a short sell when a relative is involved? We are also considering chapter 7 for our other debt. As far as credit records go, is there any benefit to avoiding foreclosure if our credit would be ruined by bankruptcy?

  • nathan

    Divorce unfortunately imminent… We need to sell our home, neither one of us can make the payments alone. The house is almost certainly worth less than what we owe; especially after fees etc… Suggestions, comments would be appreciated greatly.

  • Short Sale Investor

    Depending on the type of mortgage that you have, you should be able to get the mortgage company to accept the short sale as payment in full. If you would like a professional evaluation, contact me directly and we can go over your specific situation. We’ve completed over 250 short sales this year.

  • Short Sale Investor

    If you owe more than your house is worth, it’s generally the best choice to go with a short sale but every state’s laws are different. You may want to consider speaking with a lawyer or real estate agent to determine the best direction. The good news is that if you decide to short sale your house, typically the bank will pay all of the real estate agent commissions and fees. Your credit will be hurt but if you are able to make your payments on your other debts, you can probably get that credit score back in a few years.

  • Allan Kleer

    Great Article. I have recently discussed this topic on my blog. And you are right, Short Sale is always a better option than foreclosure. Foreclosure not only affects your credit but may also play a role in your future employment.

  • Katherine Cameron

    Hi I live in Palm Beach county and my husband and I need some expert help
    re short sales . Do you have an office in palm beach county?

  • rebecca

    I just got married in July and my now husband’s house that we live in is up for forclosure as of just days ago. He got really sick a month before the wedding, which put him out of work and medical bills mounted!
    The mortgage company was told about the life-threatening illness, but wanted to double our regular payment as the only alternative it offered after we fell 3 or 4 months behind. Ummm, if we were struggling to pay the regular payment, obviously doubling the payment was not a managable solution for us.
    The mortgage company doesn’t have knowledge we are married. I wanted to know if “he” put it up for short sale could I buy it in my name only? His credit is already damaged and mine isn’t exactly great, but I think I could get a loan as a first-time homeowner. Would this be possible?

  • Laguna Niguel Short Sale Agent

    I see every day people fighting with their lenders trying to get a loan modification accepted. Once in a while some may get lucky but most of the time the lenders just lead them on taking as much of their money as possible promising they will work with them.

    Hint: If you see the word “Balloon Payment” “Guarantee” or “Up front fee”, Be extra cautious and don’t drop your gaurd. I have no respect for these lenders that will offer this and in the end foreclose anyway. Please don’t trust the lenders or Lawyers unless you have a guarantee in writing and/or you fully understand what you are getting into.

    Fact: Licensed Realtors can loos their license if they misrepresent you so they have your best interests and they don’t cost you a dime. Lawyers will charge up front fees and they will not guarantee you nothing. If they do, Beware because there is no guarantees in a distressed situation and there are sharks everywhere. Great post and 100% true. .)

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  • Paul Sanchez

    Descent article, howeevr not fully researched and valid. i am referring to your statement about banks coming after owners of the homes for deficiency judgments if the home forecloses. While this is true in some states; it is not true in others. For example, California is a non-recourse state and if the homeowner has not refinanced his residence then he is safe from these judgments. Therefore your information is somehwta inaccurate. I believe the important thing to be researched by each indivudal owner would be the income tax consequnces of either a short sale or foreclosre. Federal debt is pretty much excused with the mortgage debt relief act. However this does not protect you from reporting loss to lenders as income on your state taxes. Review your state tax laws or consult an attorney. It will give you the best information out there. What people want is accurracy and I think you have only provided partial nformation debt kid. Please due more due dilligence to inform your readers.

    Good lick and have a nice day.

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  • Rolando

    Hey guys, I defaulted on my payments for 3 mos already to apply for modification but it seems like BOA wont approve our application. Any advice? Should we just wait for them to foreclose the house? Should we short sale? Don’t really have any plan of buying another house soon.

  • Fran

    Please give me more information on this. I have heard the same thing that the chances that you do a short sale you may be liable for the difference as if you were to go with a forclosure you would not. How would I find out which one would protect me better. If the issue was not credit score hit and the issue was not being liable for the difference that the home was short how would I know?

  • BOB

    Seems like the lenders will sweet talk you into staying just to keep making that interest on the loan. They don’t want you to foreclose, they WANT your money. And yet they won’t help to get you a modification either. They’re just useless. I was approved by a greedy lender. Our payment is $1570 and our quality of life took a dump. I was assured I wouldn’t be eating beans for dinner. I guess that wasn’t a lie, I can’t even afford beans. I live hand to mouth. Guess it’s time to foreclose.

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  • mary belle patchell

    i am interested in selling my home in a short sale. i understand that you have experience in this area. my mortgage is with suntrust. i have two loans amounting to $298,000.

  • mary belle patchell

    i started in january with seeking a loan modification with suntrust. they had me down for a short sale at one time, but i backed out of that because i didn’t understand what it was. now i am 3 months behind in my mortgage and want to do a short sale. is it possible since the paperwork started at the first of the year? i have a first and second mortgage on my home to the sum of $298,000 and the tax value is $346,000. the bank said i couldn’t make any payments now except to pay if off in full. i can pay some now.

  • Mary

    It is 100% certain that you will not be able to perform a short sale with a 2nd mortgage. Take my word for it. I see it all the time, as I work in REO (bank owned property) sales. The first mortgage will negotiate, but the 2nd mortage NEVER does. Give it up, it’s time to let go.

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  • gswr

    i am more confused abut short sale than eveer. will ypu be released from what you owe citban,k, can you get yur life back. i would like to pay my mortagee but what can you do if you do not have job where do you live, what happens to money you have paid on a home that is not longer yours. know cannot live for free but if no income pitch a tent in the yard….

  • Maria

    I am interested in more information on a short sale and people in my area that may be able to help. I live in Faribault MN. We are 7 months behind on our mortgage and just got word today that we don’t qualify for a loan modification. Thank you.

  • Andrea Fabucci

    SAME SITUATION hELP!!!!!!!!!!!!!

  • stanley hoffmann

    I think people need to take this article for what it is worth…An advertisement for real estate agents that want to represent people during a short sale. As others have correctly pointed out, only one side of the story is being told and the facts used are referring to states that do not have an anti deficiency law on the books. In those states as long as the property is for the last 6mo your primary residence and the loan you currently have was used to purchase the property you may be better off with the foreclosure. Generally the wait times for obtaining another mortgage (FHA) will be 3 years.

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  • Rosanne Allen-Hewlett

    I think this is a great article and one that I will share with clients that are on the verge of losing their home. Yes, even in Scottsdale !! This economy is affecting all of us one way or another and any help we can give the public is better than none. We are professionals in our field and we should be there to give good, sound advice during the good times as well as the tough. I would like to be on your referral list so please feel free to contact me if you need an agent from Scottsdale, AZ.

  • Jackie

    Fascinating how most real estate agents sell the effect of a short sale as non existent. Having said that fico claims the opposite (exactly the same hit as a foreclosure).
    Heres a good credit impact breakdown right here together with fico and fannie mae facts.

  • Ava

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    Foreclosure: Which is the Better Option?. And I
    actually do have 2 questions for you if you do not mind.

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    look like written by brain dead visitors? :-P And, if you are posting at additional sites, I’d like to follow anything fresh you have to post. Could you make a list of every one of all your community sites like your linkedin profile, Facebook page or twitter feed?

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