What is a Short Sale?
Short Sales vs. Foreclosures: Understanding Your Options
When a homeowner owes more on their mortgage than their property is worth—also known as being "upside down"—a short sale can be a potential solution. Unlike foreclosure, a short sale allows homeowners to sell their home for less than what is owed, with lender approval. While this process isn't right for everyone, it can help avoid many of the long-term financial and credit consequences of foreclosure.
Since misconceptions about short sales are common, it's important for both homeowners and buyers to understand how they work and what to expect.
What is a Short Sale?
A short sale occurs when:
- The homeowner cannot afford their mortgage payments due to financial hardship (such as job loss, injury, or other life changes).
- The property is worth less than the remaining loan balance.
- The lender agrees to accept less than the full amount owed to facilitate the sale.
However, not all homeowners qualify for a short sale. Lenders typically evaluate:
- The homeowner’s financial hardship.
- Their disposable income and ability to repay.
- Whether paying off the full mortgage balance is realistically possible.
What to Expect in a Short Sale
Short sales require third-party approval from the lender, which can extend the closing timeline. Unlike a traditional home sale, sellers do not profit from the transaction—the goal is simply to avoid foreclosure and minimize financial damage.
What a Short Sale is Not
A short sale is not a foreclosure.
A foreclosure occurs when a lender repossesses the home due to non-payment and sells it to recover losses. In contrast, a short sale is a voluntary agreement between the homeowner and the lender to sell the home at market value.
While foreclosures are often more attractive to buyers due to lower prices, they come with more severe consequences for sellers.
Short Sale vs. Foreclosure: Key Differences for Sellers
| Factor | Short Sale | Foreclosure |
|---|---|---|
| Future Loan Eligibility | Can qualify for a Fannie Mae-backed mortgage in 2-3 years | Must wait 5-7 years before applying for another mortgage |
| Credit Score Impact | Credit score may drop 50-100 points | Credit score may drop 250-300+ points |
| Credit History | Reported as "settled" or "negotiated"—less damaging | Stays on credit report for 7 years |
| Impact on Employment | No impact on credit background checks | Foreclosure can appear in background checks and may affect employment |
| Deficiency Judgment | May be negotiated with the lender | Lender has full rights to pursue unpaid balance |
The Advantages of a Short Sale Over Foreclosure
- Better for Your Credit – A short sale has less impact on credit scores and typically does not appear as a foreclosure on credit reports.
- Easier Future Loan Approvals – Lenders look more favorably on short sales, allowing homeowners to requalify for loans sooner.
- Less Impact on Employment – Many employers conduct credit checks during hiring. Foreclosures can be a red flag, while short sales generally do not affect employment opportunities.
- Potentially Avoiding Debt Liability – In some cases, homeowners can negotiate with the lender to waive their remaining debt.
Making the Right Choice
Deciding between a short sale and foreclosure is a personal decision that depends on financial circumstances. Each option has its pros and cons, but a short sale is often the more favorable choice for homeowners looking to minimize long-term financial damage.
If you're considering a short sale or facing foreclosure, seeking expert guidance is essential. Understanding your eligibility, legal rights, and financial options will help you make the best decision for your future.
