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

The desire to purchase a house is normal, yet achieving this goal takes careful preparation and consistent saving. Many individuals find that getting a mortgage is the best option.

However, there are instances when the financial crisis may transform your hard-won ambition of owning a house into a nightmare, such as when there is a loss of income due to unemployment, an increase in interest rates, or an unforeseen debt load. It impacts the monthly mortgage payments, and finds themselves looking for ways to save or sell their home. In this scenario, the homeowner has two options which are Foreclosures and short sales, who fall behind on mortgage payments, but it’s important to understand the difference between these two processes.

What is Foreclosure?

After the borrower or homeowner is unable to make the full principal and interest on those principal payments on their mortgage loan, as stipulated in the mortgage deed or the contract. Foreclosure is the legal process by which the lender will take control of the mortgaged property and also evicts the borrower or, say, the homeowner and will sell the property. In order to recover the existing debt amount, the lender forces the sale of the property at an auction.

What is the Short Sale?

When the property is sold for less than the outstanding mortgage balance, the transaction is known as a short sale. It’s crucial to keep in mind that short sales may only be completed with lender consent. All of the earnings from the sale of the property once the lender has given its approval to the short sale go to the lender; as a result, the homeowner receives nothing and is still liable for the mortgage’s outstanding balance.

How are short sales and foreclosures different from one another?

Homes that are short-sale or foreclosed are sometimes referred to as distressed properties. There might not always be physical distress with the property; it could also be financial distress.

Situation – Foreclosure is used when a mortgagor is unable to make payment. In contrast to a short sale, when a mortgage holder falls behind on payments, the value of the asset covered by the mortgage is less than what he owes, and the lending institution approves.

Procedure Time – There are significant procedural differences between short sales and foreclosures. Due to the lenders’ desire to get paid what they are due, foreclosures often go considerably more quickly than short sales, which might take up to a year to complete.

Impact – Additionally, compared to a foreclosure, a short sale has significantly less of a negative impact on your credit score. Although getting a second mortgage could be more difficult, people who go through the short sale procedure can buy another property immediately. On the other hand, a foreclosure will remain on your credit record for seven years. A further five years must pass before you can purchase another home. Both have a negative impact on your tax return, credit score, credit report, and future loan possibilities.

The best way to proceed is to speak with your lender to discuss your possibilities if paying your mortgage has turned into a significant burden. There’s a good chance that your lender can recommend the best strategy depending on the specific situation and the guidelines set.


The main difference between the two is that a short sale is a voluntary sale, but a foreclosure is a forced sale, meaning that it occurs to you against your will. Both have come with pros and cons. When a borrower is in this situation, a short sale is a better option than a foreclosure, but it requires more paperwork.

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