Short Sale vs Foreclosure: What is the Difference?

What is the difference between a short sale and a foreclosure? Short sales and Foreclosures are both options for homeowners who fall behind on mortgage payments, but it’s important to understand the difference between these two processes.

Short sale and foreclosure are similar in that they’re both financial options for individuals who need to sell their home, but owe more than the home is worth. In many cases, the seller is facing a form of financial hardship, but not always. Both a short sale and a foreclosure have a negative impact on your taxes, credit score, credit report, and future ability to buy a home. 

But short sales and foreclosures differ greatly in how much they affect the above items and the overall process. A short sale transaction occurs when mortgage lenders allow the borrower to sell the house for less than the amount owed on the mortgage. (For a deeper explanation of the short sale process, make sure to read “What is a Short Sale”.) The foreclosure process occurs when lenders repossess the home through an auction or court action.

Timing can differ greatly. A short sale can take up to one year to close, while foreclosures generally move along much faster because lenders are intent on recovering the money they’re owed.

Furthermore, a short sale is far less damaging to your credit score than a foreclosure. In fact, people who go through the short sale process can usually buy another house without having to wait, although securing a second mortgage might be more challenging. Foreclosure, on the other hand, will stay on your credit report for seven years, and you will have to wait a minimum of five years to buy another house.

If you’re struggling to pay your mortgage and aren’t sure what to do, below is a comparison of the two options to help determine which is the better option for you.

Short Sale vs Foreclosure Comparision

  Foreclosure Successful Short Sale
Cost None None
Method of Sale Sold in a public auction at the courthouse. Sold through a realtor, the same as a traditional sale.
Privacy Public Knowledge. It can be handled discreetly.
Option to Receive Money/Relocation Assistance No Yes. In most cases, we are able to obtain “relocation assistance” for our sellers.
Who Is In Control The Lender The Seller
Credit Score A foreclosure will show up as a public record on your credit report. (Similar to bankruptcy.) Typically will drop 200-400 points and will remain on credit for 7 to 10 years. Only the late payments will be reported. Once the short sale is completed, it will be reported as “settled for less than the full amount due” (or similar verbiage). Depending on overall credit, the impact can be as little as 50 points and on average is between 50-150. A short sale’s effect can be a brief as 12 to 18 month
Future Home Purchase Any individual that loses their property to foreclosure will not be eligible for 5 years with restrictions or 7 years with no restrictions. Can purchase immediately in some circumstances, and can be up to 2 years.
The Balance of the Loan (Deficiency Rights) In California, many loans give the lender the right to pursue the homeowner for a deficiency after the foreclosure has taken place. (Each state’s laws are different. During the short sale negotiations, we negotiate to have the lender agree in writing to forgive the remaining balance and release the homeowner from any future deficiency right after the close of escrow.
Employment Most employers have the right to check the credit employees who are in sensitive positions. In some positions, a foreclosure may be grounds for reassignment or termination. A short sale is not a public record and is reported separately on a credit report. The employer will only see late payments and an account that has been settled. This shows that you worked with the lender towards a resolution and typically looks much better to the employer.
Security Clearances Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. A Short Sale on its own does not challenge most security clearances.