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Home » Shortsale vs Foreclosure: What Homeowners Need to Know

Shortsale vs Foreclosure: What Homeowners Need to Know

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Despite all the hard work you put into becoming a homeowner, unforeseen financial issues can derail your plans, forcing you to choose between shortsale vs foreclosure to fulfill your mortgage obligations. 

Both “short sale” and “foreclosure” pertain to real estate transactions where homeowners struggle to find a solution to pay off their mortgage. You’re likely in a financial crisis if you ever Google these terms. Therefore, the only valid option left is to part with your home and thus end the dream of homeownership. 

But the shortsale vs foreclosure debate requires deep-diving to explain to homeowners what both mean regarding paying off mortgages. This article will explain the shortsale vs foreclosure debate, giving homeowners all the information they need to determine the appropriate course of action during troubling financial times. 

What Is a Shortsale?

A short sale is a process where homeowners sell their property for an amount that is less than the outstanding balance on their mortgage. There could be numerous reasons a homeowner would need to sell their property to pay off their mortgage, including sudden unemployment, loss of income, medical emergencies, etc. Because homeowners cannot keep up with their mortgage obligations, they have to bite the bullet and sell their property for a lower sale price. 

It’s important to mention that during a short sale process, the lender (the bank) signs off on the decision to allow homeowners the chance to begin the process. This means a shortsale is voluntary, and homeowners can only initiate a shortsale with the lender’s approval.

A short sale means the lender agrees on the homeowner’s decision to sell the property for a lower sales price as full payment for the mortgage debt, thereby “shortening” the original loan amount. 

For example, let’s assume a homeowner owes a mortgage debt to the lender for $250,000. The homeowner and the lender agree on a shortsale price of $220,000. The property sells, but the homeowner still owes $30,000 plus other costs associated with the sale to the lender.   

Shortsale Key Points

  • The homeowner initiates the sale process and works with their lender to obtain approval for the short sale.
  • The homeowner must provide documentation demonstrating financial hardship and an inability to continue making mortgage payments.
  • The lender evaluates the homeowner’s financial situation and the proposed sale price to determine if a shortsale is acceptable.
  • If approved, the property is listed on the market, and potential buyers can make offers. However, the lender ultimately has the final say on whether to accept an offer.
  • The proceeds from the sale are used to pay off as much of the mortgage debt as possible. The homeowner is still responsible for any remaining balance, depending on the agreement with the lender and applicable state laws.
  • A short sale generally has less severe consequences for the homeowner’s credit score compared to foreclosure, although it can still have a negative impact.

What Is a Foreclosure?

A foreclosure is a legal process where the lender (the bank) takes legal action to seize the homeowner’s property and sell it to repay the mortgage. Foreclosures occur when the homeowner is unable to make mortgage payments or defaults on the loan. Foreclosures are generally considered a last resort by the lender and an involuntary process.

During a foreclosure process, the lender will sell the property and use the money to recover what they’re owed by the borrower (homeowner). 

Since foreclosure is an involuntary process, it can only be initiated by the lender (the bank). For a foreclosure to occur, the homeowner must fall behind a number of months on their mortgage. But foreclosure laws vary from state to state and can negatively impact a homeowner’s credit score. 

Foreclosure Key Points

  • Foreclosure is initiated by the lender, usually after a homeowner has missed multiple mortgage payments and cannot solve their financial difficulties.
  • The foreclosure process varies depending on the jurisdiction but generally involves legal notices, court proceedings, and public auctions.
  • Once a property is foreclosed, it is usually sold at a public auction to the highest bidder. If there are no buyers at the auction, the property becomes “bank-owned” or an “REO” (Real Estate Owned) property.
  • The proceeds from the foreclosure sale are used to repay the outstanding mortgage debt and cover any associated costs. If the sale amount is insufficient to cover the debt entirely, the homeowner may still be held responsible for the remaining balance, known as a deficiency.
  • Foreclosure has a significant negative impact on the homeowner’s credit score and can make it more challenging to obtain future loans or credit.

Shortsale vs Foreclosure – The Differences

Below is a table outlining the main differences between a shortsale vs foreclosure:

InitiationInitiated by the homeownerInitiated by the lender
Sale PriceHomeowner lists and sells the propertyProperty is seized and sold by the lender
Financial SituationHomeowner is facing financial hardshipHomeowner has defaulted on mortgage payments
Approval RequiredLender’s approval is necessaryNo homeowner approval is required
Mortgage Debt RepaymentProceeds from the sale are used to pay off the debtSale proceeds are used to repay the outstanding debt
Remaining Debt ResponsibilityHomeowner may be responsible for the remaining debtHomeowner may be liable for any deficiency
Credit ImpactCan have a negative impact on the homeowner’s creditHas a significant negative impact on credit score
ConsequencesGenerally less severe consequences compared to foreclosureMore severe consequences for the homeowner
Property Ownership During ProcessHomeowner owns the property until the sale is completedProperty ownership transfers to the lender
Time FrameCan have a shorter process depending on jurisdictionCan have a shorter process depending on juristiction


Understanding the shortsale vs foreclosure argument helps homeowners understand what options they have left to pursue when facing financial difficulties and being unable to pay their mortgage. 

Both are unpleasant for the homeowner and highlight their inability to keep up with their mortgage payments. 


What are the benefits of a short sale vs foreclosure?

Short sales are generally more beneficial for all parties involved compared to foreclosures. During a shortsale, the lender agrees on a price with the homeowner, usually greater than a foreclosure sale. Moreover, homeowners face fewer financial repercussions during a short sale than a foreclosure.

Why is a short sale risky?

Short sales leave homeowners with little to no money when selling the property. That’s because a property listed for a short sale will go for less than the outstanding debt owed to the lender.

What is the purpose of a short sale of a home?

A short sale allows homeowners to clear some of the mortgage debt owed to the bank by selling the property. Therefore, the purpose of a short sale of a home is to serve as a financing option.

Why is foreclosure risky?

Foreclosures are much riskier than short sales because the borrower (the homeowner) has no power or influence over the process. A foreclosure occurs when the homeowner has no options left. Therefore, the lender will initiate the foreclosure process and put the property up for auction.

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