What Is The Difference Between Short Sales and Foreclosures?

What Is The Difference Between Short Sales and Foreclosures?

For homeowners who fall behind on their mortgage payments, mainly due to a sudden financial crisis, such as unemployment and other income loss, unexpected debts, interest rate hikes, or economic downturn, among others — the two main options available are either a short sale or foreclosure. So what is the difference between Short Sales and Foreclosures?

short sales vs foreclosures

In both cases, the owner is forced to part with their hard-won investment, turning their homeownership dream into a nightmare. 

Let’s take a closer look at what these things are, their differences, and which is the better option for any homeowner depending on their situation and timeline.

Real estate photo


A short sale occurs when the homeowner or property holder owes more on the mortgage balance than the sale price of the property at the point they want to sell. It happens when the home has substantially depreciated in market value since its purchase. For example, if the homeowner sells a house for $200,000, but still has a remaining mortgage loan balance of $250,000, that would be a short sale. The homeowner or seller is technically “short” by $50,000.

No short sale may happen without the blessing of the lender. Once the short sale is approved by the lender and the property is sold, all proceeds from the sale go to the lender. The homeowner gets nothing and ideally will be free of any financial obligations for the home. 

However, one thing to watch out for is the so-called “deficiency judgment”, which the lender can file against the homeowner to make up for the loss. While many states outlaw this practice, it’s critical that you read over your paperwork or ask about it to ensure you won’t have any personal liability.

Real estate photo


A foreclosure, on the other hand, is a legal process that takes place when a homeowner (or borrower, in this matter) stops making mortgage loan payments for a significant period of time. After three to six months of missed payments, a lender will issue a Notice of Default with the county recorder’s office. The notice is to inform the homeowner that foreclosure proceedings have started, and they could be at risk of getting evicted. 

After receiving the notice of default, the borrower enters into what’s known as the “pre-foreclosure period”, which can last anywhere from 30 to 120 days. During this time, you’ll have the opportunity to work with your lender to avoid foreclosure, either through any of the following:

  • Paying the past due balance in full;
  • Modifying the mortgage terms and reducing your monthly payments;
  • Selling the home through short sale or deed in lieu of foreclosure.

If the debt isn’t resolved by the end of the pre-foreclosure period, the lender will step in and foreclose on the home. The homeowner will be evicted and a foreclosure auction will be scheduled to sell the house to a third party. If the property isn’t sold at auction, the lender becomes the owner and it’s then considered a bank-owned or real estate-owned property.

Real estate photo


Homeowner’s involvementVoluntary by the homeowner but requires approval from the lenderInvoluntary for the homeowner; the lender takes legal action to take control of the property
Speed and timingTypically takes 90 to 120 days or even longer, since the bank won’t approve the sale without a buyer agreeing to its demandsMoves along much faster since lenders want to recoup the costs incurred by the unpaid mortgage
Impact on credit scoreFar less damaging to the borrower’s credit scoreWill stay on a borrower’s credit report for seven years
Living in the homeHomeowners can stay in the home until the sale is completedHomeowners are forced to vacate
Payment terms (for buyers)Can be bought with a mortgage loanCan only be purchased with cash
Method of saleListed by a real estate agent specializing in short salesAuctioned

Share this post!

About the Author

Jason Fox

Facebook Twitter

"The best way to find yourself is to lose yourself in the service of others." ~ Gandhi [ Recognized as a top 3.5% agent in the United States. ] [ Jason Fox was born in Everett, WA currently lives in the Meadowdale neighborhood in Lynnwood and has lived in different parts of the Puget Sound area in between. He has been in the real estate industry for 20 years in many different capacities. From General Manager of a real estate CRM engagement business, Founder of 2 real estate marketing agencies, nationally recognized blogger with the Jason Fox Real Estate Marketing Blog, Marketing Manager for a top title and escrow service. ] [ Jason is now an award winning residential real estate sales agent, Co-Founder of The Madrona Group, Co-Owner of John L. Scott Ballard and John L. Scott Westwood. ] [ Active in the community, Jason is a proud part of the Autism Speaks effort to raise awareness for autism. This project is very dear to him as he has an 8 year old son, Hudson, diagnosed ASD. Jason is also involved with Neighbor's in Need, the Forgotten Children's Fund, WELD Seattle and the Union Gospel Mission assisting the homeless population in the greater Seattle area. ] [ "My passion is being able to give back to the community that has given so much to me." ] [ When he is not assisting his friends and family with the services of home ownership he loves being a dad to his 4 children, Carter, Rowen, Tyler and Hudson and being a husband to his amazing wife Sarah. Hiking, working around the house, cheering for the Seahawk's, Mariners and Huskies and golfing. ]

Leave a Reply

Your email address will not be published. Required fields are marked *