Reviewed by: Brandon Brown

If your mortgage is “underwater,” it means you owe more than your property is worth—combined with difficulty making monthly payments, this scenario can quickly lead to the loss of your home. The outcome is often either a foreclosure or a short sale. What’s the difference between a short sale in real estate vs foreclosure? The biggest distinction lies in who the active party is—who takes the initiative and, to some degree, exercises control over the process. Other differences include the timeline, potential tax and credit consequences, and the potential for tag-along debt. Homeowners don’t simply have to choose between the two options, however. FlipSplit offers a third, speedier pathway that allows you to avoid both foreclosures and short sales. Understanding the choices available can help you make informed, strategic decisions that can impact your budget and creditworthiness for years to come.

What Is a Short Sale?

A short sale occurs when a property is sold, with lender approval, for less than the amount of the mortgage still owed. Let’s consider an example:

• Aimee bought a house in 2015. In 2020, she quit her job to open a small business, funding the start-up with a cash-out refinance (which increased her mortgage principal).
• After a few years of breaking even, her business went downhill, and she’s been using up her savings to cover expenses. She’s no longer able to make monthly mortgage payments and knows she needs to sell her home, but discovers that it’s worth less than her mortgage payoff amount.
• She contacts her lender to explain her situation. The lender asks for documents to back up her claims that she doesn’t have the assets or income to pay off her mortgage. They agree to a short sale, which means the lender is closely involved with each step of the listing, offer negotiations and acceptance, and sale closing.
• As part of the short sale process, her lender agrees to forgive the outstanding debt (the difference between the home sale price and her remaining mortgage due).

What Is a Foreclosure?

A foreclosure occurs when a lender repossesses and sells a property due to missed mortgage payments. The potential for foreclosure is built into every mortgage contract, allowing a lender to take full ownership of a property if the borrower doesn’t repay the loan. For mortgages, real estate serves as collateral to secure the loan. The sunny side of collateral is that it allows you to obtain a much lower interest rate than an unsecured loan, but the negative is that the lender can repossess the collateral if the loan is not repaid. So, how would a foreclosure work in the short sale example above?

• Instead of contacting her lender, Aimee doesn’t take any action and begins missing her mortgage repayments.
• After 90 days, her lender sends a notice of default listing the amount due and the steps she must take to avoid foreclosure.
• If Aimee doesn’t enter a repayment plan or follow other options provided in the default notice, the lender begins the active foreclosure process that leads to their repossession and sale of the property. The lender sells the property, and the new owners evict her from her home.

State foreclosure laws vary. Depending on your location, a situation like the one above could end in:

• Judicial foreclosure – Judicial foreclosures begin with lawsuits, require oversight by the courts, and allow more opportunities for the borrower to defend against the foreclosure. However, this option takes longer and costs the lender more than in nonjudicial foreclosures.
• Nonjudicial foreclosure – Nonjudicial foreclosure starts with a notice of sale that relies strictly on the terms of the mortgage or deed of trust rather than involving the court. This route is faster and generally considered to offer less protection for the homeowner.

The exact process of who serves papers, the number of days required between steps, and other details vary by state. Some states permit both judicial and nonjudicial foreclosures. Check your mortgage contract, which should cover the foreclosure method to be used in the event that you default on the loan.

What Are the Pros and Cons of a Short Sale?

There are definitely some pros to rolling forward with a short sale vs. waiting on a foreclosure. Short sales can:

• Help you exert control over your situation and stay involved throughout the process
• Provide a way to exit an active debt
• Offer an opportunity to negotiate forgiveness of the remaining unpaid debt
• Move forward more quickly than a judicial foreclosure
• Lead to slightly less damage to your credit than a foreclosure

On the other hand, there are certainly drawbacks to a short sale. They:

• Require lender approval (including from secondary lenders for second mortgages)
• Often require a cash payout to secondary lenders in order to secure their approval
• Are labor-intensive: Owners must seek agents, prepare homes for showing, and more
• Damage your credit nearly as much as a foreclosure does
• Can speed up owners’ timelines for finding a new place to live

Key Differences Between a Short Sale and Foreclosure

How can you make the best decision on a short sale vs foreclosure? Consider the following nuances.

Who Controls the Process

In a short sale, the homeowner still has some control of the process. However, they must obtain lender approval for:

• List price, typically based on a lender-arranged professional appraisal
• Offer negotiations and acceptance
• Final sale closing

In foreclosures, the lender takes over entirely, leaving the homeowner in a position similar to a renter undergoing eviction.

Impact on Credit Score

Both options significantly damage your credit score and history, but short sales are slightly less impactful and lasting than foreclosures.

• Short sales are recorded as settled debt vs. foreclosure.
• Credit scores drop by up to 150 points for short sales.¹
• Credit scores drop by up to 160 points for foreclosures.²

Speed and Timeline

How long each process takes depends on where you start counting, what state you live in, and how quickly you act. You can begin the process of requesting a short sale or an offer from an iBuyer like FlipSplit at any time. However, foreclosures occur only after the clock has counted down on preliminary stages, and the total duration depends on the type of foreclosure enacted^3,4:

• Delinquency – 90 to 120 days of missed mortgage payments (3 – 4 months)
• Preforeclosure – 30 or more days after a notice of default (about 1 month)
• Judicial foreclosure – Several months to years (slowest state: AZ at 5+ years)
• Nonjudicial foreclosure – A few months (fastest state: WV averaging 48 days)

Once you’ve missed two consecutive mortgage payments, foreclosure can take anywhere from three and a half months to several years. Alternative timelines include:

• Short sale – On average, 3 – 6 months⁵
• FlipSplit sale – As fast as 2 – 3 days, or up to 90 days based on your preference

Future Home Buying Eligibility

Foreclosure may delay future home buying longer than a short sale. Short sales and foreclosures both show up on your credit history for seven years, limiting your ability to acquire credit and buy property. However, lenders are more willing to negotiate around settled accounts (and short sales are listed as settled debt on your credit report). To lenders, a short sale means that you didn’t repay your loan in full—but you did take action to arrange a settled debt. On the other hand, a foreclosure reflects more passivity and noncompliance without the borrower showing a willingness to take action to correct the situation.

What Are the Pros and Cons of a Foreclosure?

There are silver linings to every cloud. Foreclosure benefits include:

• Less work for you than a short sale
• A resolution to debt if you have no other options
• Continued residence until the sale is completed
• Cash offers from lenders in exchange for moving out before the sale

The drawbacks of foreclosures include:

• Severe damage to your credit
• Removal of any control over the process
• For judicial foreclosures, time spent on legal proceedings

Which Option Is Better for Homeowners?

No single option is the right choice for every individual and situation, so you’ll need to consider the pros and cons of all paths forward.

• Short sale – If you’re looking for a more graceful exit to homeownership than foreclosure—and a bit less damage to your credit—talk to your lender about a short sale. You’ll have more work to do, but it will give you some control over the process and outcome.
• Foreclosure – Foreclosures are simply unavoidable at a certain point. But if you know your budget won’t stretch to make your mortgage payments in the coming months, you can make an informed choice about whether to allow a foreclosure to proceed or opt for a short sale or sell to a direct buyer. Opting for foreclosure can permit you to spend limited time and resources on figuring out where to go next.
• Direct buyer – A third option may be available through a fast, as-is cash sale to a direct buyer.

FlipSplit: A Simpler Alternative to Short Sales or Foreclosures

It’s not simply a matter of foreclosure vs short sale—homeowners struggling financially have other options. Consider an iBuyer as another alternative. In Southern California, FlipSplit helps homeowners sell quickly for cash with no lender approval or lengthy process required. Working with FlipSplit is ideal for those facing hardship who want to move forward quickly without red tape. With us, you won’t invest time and work into fixing up a home before a sale, and you’ll spend $0 in upfront costs. Rather than a short sale or foreclosure, talk to us about selling your home as-is, on your timeline, with no fees or closing costs. Learn more today.  

Reviewed by: Brandon Brown

As a long-time Asset Manager, Investor, Real Estate Agent, and Broker/Owner of BayBrook Realty in Orange County, Brandon Brown is one of FlipSplit’s lead Real Estate experts. Having worked on over 2,000+ real estate transactions, Brandon brings a depth of knowledge that ensures clients are appropriately treated with honesty and integrity. His insights and advice have been published in numerous blogs beyond FlipSplit, and he keeps a close eye on market trends and statistics, which are updated weekly on his social media pages. Outside work, you can find him participating and serving at church, cycling, mountain biking, surfing around Orange County and beyond, and enjoying time with his wife and two daughters.

Sources:

1. Advantage Legal Group. How Low Will My Credit Drop After a Short Sale or Foreclosure? https://advantagelegalgroup.com/foreclosure-defense/how-low-will-my-credit-drop-after-a-short-sale-or-foreclosure/
2. Nolo. How Long Does a Foreclosure Stay on Your Credit Report? https://www.nolo.com/legal-encyclopedia/how-long-does-a-foreclosure-stay-on-your-credit-report.html
3. Nolo. The Difference Between a Judicial and Nonjudicial Foreclosure. https://www.nolo.com/legal-encyclopedia/the-difference-between-a-judicial-and-nonjudicial-foreclosure.html
4. Experian. How Long Does Foreclosure Take? https://www.experian.com/blogs/ask-experian/how-long-does-foreclosure-take/
5. Kaplan Real Estate Education. What Is a Short Sale in Real Estate and How Do They Work? https://www.kapre.com/resources/real-estate/short-sales