What’s the Difference Between a Short Sale and a Foreclosure?

Can’t keep up with mortgage payments and need to sell your home fast? You have options. Some homeowners think foreclosure is the only way out, but short sales or cash sales are possible for those dealing with financial hardship.

Let’s break down what these options mean and how they affect your future. The right choice depends on your situation and could impact your credit report for years to come.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

Quick Takeaways You Can Save

• Short sale: Selling your home for less than you owe on your mortgage balance (with mortgage lender approval)
• Foreclosure: Lending institution takes your house because of missed monthly payments
• Short sales may hurt your credit less
• After short sales, wait 2-4 years to buy again versus up to seven years after a foreclosure
• The foreclosure process tends to happen faster but damages your financial future more
• Both options might trigger tax bills when homeowner sells—talk to a tax pro

What is a Short Sale?

A short sale happens when you sell your home for less than what you still owe on your mortgage balance. The short sale process begins when your mortgage lender agrees to accept as much money as possible from the sale even though it’s less than you promised to pay.

Why would a bank agree to this? Because they often lose less money on a short sale transaction than they would through the foreclosure process.

You’ll need to prove you’re in financial distress causing you to be behind on your payments. Job loss, medical bills, divorce—these are common reasons banks accept short sales. You can’t just do a short sale because your home dropped in value.

Short Sales: The Better Parts

Short sales have some clear advantages when compared to foreclosed homes. Depending on how your lender lists the short sale on your credit report, the hit to your score may not be as bad as with foreclosure. 

You stay in control of selling your home. You work with real estate agents who understand the legal process of short sales, show the property, and review offers—very different from a foreclosure sale where the lender takes ownership.

Want to buy another home someday? After a short sale, you might qualify for a new mortgage in just 2-4 years. After foreclosed properties appear on your credit report, you’ll likely wait up to seven years before any mortgage lender will work with you again.

Short Sales: The Tough Parts

The short sale process takes time—sometimes lots of it. When homeowner falls behind on monthly payments and pursues a short sale, the process can drag on for months while your mortgage lender reviews everything. You’ll need patience.

Ever heard of “deficiency balance”? That’s the difference between what you owe on your mortgage balance and what the house sells for. In some states, lenders can still come after you for as much money as possible even after the short sale transaction is complete.

The IRS might consider debt forgiveness as income. The Mortgage Forgiveness Debt Relief Act sometimes helps with this, but talk to a tax pro about your situation.

And remember—your mortgage lender doesn’t have to approve your short sale. They might say no if they think the foreclosure process is better for them. Some lending institution policies make short sales difficult, especially if you’ve only missed one or two monthly payments.

What is a Foreclosure?

When a homeowner falls behind on mortgage payments, the foreclosure process begins—it’s a legal process where lender takes ownership of your property. The bank then holds a foreclosure sale (usually at auction) to recover what you owe them.

Each state handles the foreclosure process differently. Some states require court approval (judicial foreclosure), while others don’t (non-judicial foreclosure). This affects how long the process takes—anywhere from a few months to over a year.

Foreclosed properties often sell for less than market value at auction. Once the foreclosure process starts, you have very little control over what happens next, unlike a short sale.

Foreclosures: The Less Bad Parts

The foreclosure process happens faster than a short sale transaction. Once the legal process starts, you know there’s an end date. With a short sale, you might wait months for approval that never comes.

If your foreclosure sale brings in as much money as your mortgage balance, you’re off the hook for that debt. But this rarely happens in practice—foreclosed homes typically sell below market value.

You can also stay in your home throughout the legal process. This gives you time to sell your home in foreclosure or catch up on payments.

Foreclosures: The Bad Parts

Your credit report will take a major hit when foreclosed properties appear on it. Expect your score to drop 100+ points after foreclosure. This affects everything from future housing to car loans to credit cards.

Any equity you built in your home? Gone. The foreclosure sale rarely brings market value for foreclosed homes—the lending institution just wants to recover as much money as possible.

Foreclosure creates a very public record of financial distress. Everyone in your community can find out when lender takes ownership of your property.

The emotional toll is heavy too. Having your home taken through the legal process feels awful—many people report depression, anxiety, and shame during foreclosure.

Worst of all, most mortgage lenders won’t give you a new loan for up to seven years after foreclosure. That’s a long time to put your life on hold.

How to Avoid Short Sales or Foreclosures

The best approach? Avoid both situations if possible. Here are some strategies that might help avoid foreclosure or a short sale.

Don’t Miss Payments

This sounds obvious, but it’s worth saying: do everything possible to keep making those monthly payments on time.

Create a bare-bones budget that covers just the essentials. Cut cable, subscriptions, eating out—anything that’s not absolutely necessary.

Call your mortgage lender BEFORE you miss a payment. Many lending institutions have financial hardship programs that can temporarily reduce or suspend monthly payments. Don’t wait until you’re already behind to ask for help.

If you have other debts (credit cards, car loans), talk to those lenders too. They might work with you so you can focus on keeping your home. Remember that a single missed payment can start the path toward financial distress and eventually the foreclosure process.

Sell For Cash

If you’re not underwater on your mortgage balance (meaning you don’t owe more than the home’s market value), selling quickly for cash might be your best option to avoid the short sale process or foreclosure.

When homeowner sells for cash, buyers can close in as little as 7-14 days. No waiting for mortgage approvals or dealing with picky buyers.

You might get less money from a cash sale, especially if you’re selling as-is, but you avoid the credit report damage from short sales or foreclosed properties. That alone might be worth the trade-off.

Look for “we buy houses” companies or real estate investors in your area. Just be careful—some are legitimate, others aren’t. Get multiple offers if possible. Even in a cash sale, working with experienced real estate agents can help protect your interests and ensure you get as much money as possible.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

Short Sale vs Foreclosure: Making the Right Choice

When facing mortgage trouble, a short sale usually beats foreclosure for most homeowners. The short sale process helps you recover faster, both financially and emotionally.

But every situation is different. If your mortgage balance is far above the market value of your home, sometimes the foreclosure process might make more sense to the lender. If selling for cash is an option before you miss too many monthly payments, that’s better than dealing with foreclosed homes on your record.

The most important thing? Don’t ignore the problem. Taking action early gives you more choices and better outcomes.

Remember: This isn’t just about a house. It’s about your future. Make the decision that helps you recover faster and get back on your feet.