A short sale and foreclosure both involve mortgage distress, but they are not the same thing.
A short sale is a sale of the home for less than the amount owed on the mortgage, usually with the lender or servicer’s approval. Foreclosure is the legal process that can allow a lender to sell the home after the borrower defaults.
For homeowners, the difference can affect control, timing, credit, relocation and possible deficiency debt. For buyers, the difference can affect negotiation, closing timeline, property condition and legal risk.
This article is general information, not legal, tax or financial advice.
Key takeaways
- CFPB defines a short sale as a sale of a home for less than what is owed on the mortgage.
- A short sale is an alternative to foreclosure, but the homeowner still leaves the home.
- Foreclosure is a legal process that may end with the property sold by the lender or at auction.
- Short sales generally require lender or servicer approval.
- Deficiency debt may be an issue in some states unless waived.
- Buyers should expect short sales to take longer than ordinary purchases.
- Foreclosure rules and borrower rights vary by state.
What is a short sale?
The CFPB says a short sale is a type of loss mitigation in which the homeowner sells the home for less than what is owed on the mortgage. It is an alternative to foreclosure, but because it is a sale, the homeowner must leave the home.
Fannie Mae describes a short sale as the sale of a home for less than the remaining mortgage balance. The borrower sells the home and uses the proceeds to pay off part of the mortgage balance.
A short sale typically requires approval because the lender is being asked to accept less than the full amount owed.
What is foreclosure?
Foreclosure is the legal process a lender or servicer may use when a borrower defaults and cannot resolve the delinquency.
The FTC says that if a borrower cannot catch up on past-due payments or work out another solution, the servicer or lender can begin a legal action that could end with the home being sold. The FTC also notes that foreclosure can add hundreds or thousands of dollars in additional costs to the loan.
Foreclosure procedures vary by state. Some states require court involvement. Others allow nonjudicial foreclosure if loan documents and state law permit it.
Short sale vs. foreclosure: quick comparison
| Issue | Short sale | Foreclosure | |—|—|—| | Who sells the home? | Homeowner sells, usually with lender approval | Lender/servicer proceeds through legal process | | Owner control | More control than foreclosure | Less control once process advances | | Homeowner stays? | No, homeowner leaves after sale | No, owner may lose home through sale | | Lender approval | Usually required | Lender drives process | | Buyer timeline | Often slower than standard sale | Varies by auction, REO or legal stage | | Deficiency risk | May exist unless waived | May exist in some states | | Credit impact | Can be serious | Can be serious and often more damaging |
Deficiency debt matters
A deficiency is the difference between what the borrower owes and what the property sells for.
The CFPB warns that in states where borrowers are responsible for a deficiency after a short sale, the borrower should ask the lender to waive the deficiency before completing the short sale. If the lender waives the deficiency, the borrower should get the waiver in writing.
Fannie Mae’s short sale fact sheet says that after a Fannie Mae short sale is complete, the borrower is relieved of responsibility for the remaining balance through a deficiency waiver, but there may be tax consequences associated with forgiven debt.
Homeowners should speak with qualified legal and tax professionals before agreeing to terms.
Why homeowners may choose a short sale
A short sale may be considered when the homeowner cannot afford the home and owes more than the home is worth.
The potential advantages may include:
- avoiding completed foreclosure,
- more control over the sale process,
- possible deficiency waiver,
- possible relocation assistance in some programs,
- and potentially a clearer path to resolving the debt.
The CFPB also says a HUD-approved housing counselor can help borrowers plan next steps if they choose this option.
Why foreclosure happens
Foreclosure may happen when the borrower cannot catch up, does not qualify for loss mitigation, does not accept an option or waits too long to act.
The CFPB advises borrowers who cannot pay their mortgage to call the servicer right away and contact a HUD-approved housing counseling agency. It lists possible options that may include refinance, loan modification, repayment plan, forbearance, short sale or deed-in-lieu.
The earlier the borrower acts, the more options may be available.
What buyers should know
Buying a short sale can be different from buying a standard listing.
The seller may accept the offer, but the lender or servicer may still need to approve the sale. That can create delays. Buyers should also review property condition, title issues, lien status and whether the seller has authority to close.
Foreclosure purchases can also vary. Buying at auction, buying from a bank after foreclosure and buying a pre-foreclosure property are different transactions with different risks.
A low price should not replace due diligence.
What this means
A short sale can be a foreclosure alternative, but it is still a distressed transaction. Foreclosure is usually more severe because the homeowner loses more control and may face a legal process.
For homeowners, the most important step is to contact the servicer and a HUD-approved housing counselor early. For buyers, the key is patience, due diligence and understanding which stage of distress the property is in.
Short sale vs. foreclosure is not just a vocabulary difference. It changes the process, risks and outcomes.
FAQ
What is a short sale?
The CFPB says a short sale is a sale of a home for less than what the homeowner owes on the mortgage.
Is a short sale the same as foreclosure?
No. A short sale is a homeowner sale, usually with lender approval. Foreclosure is a legal process that can result in the lender selling the home.
Does a short sale let the homeowner keep the home?
No. The CFPB says a short sale is an alternative to foreclosure, but because it is a sale, the homeowner must leave the home.
Can a lender collect the deficiency after a short sale?
It depends on state law and the agreement. CFPB advises borrowers to ask for a deficiency waiver and get it in writing.
Is foreclosure worse than a short sale?
Foreclosure usually gives the homeowner less control and can have serious credit and legal consequences. The best option depends on the borrower’s situation.
Should buyers consider short sales?
They can, but buyers should expect lender approval, possible delays and extra due diligence.
Sources with clickable URLs
- [CFPB — What Is a Short Sale?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-short-sale-en-290/)
- [Fannie Mae — What Is a Short Sale?](https://singlefamily.fanniemae.com/servicing/fact-sheet-what-short-sale-helping-borrowers-avoid-foreclosure)
- [CFPB — If I Can’t Pay My Mortgage Loan, What Are My Options?](https://www.consumerfinance.gov/ask-cfpb/if-i-cant-pay-my-mortgage-loan-what-are-my-options-en-268/)
- [HUD — Avoiding Foreclosure](https://www.hud.gov/helping-americans/avoiding-foreclosure)
- [FTC — Trouble Paying Your Mortgage or Facing Foreclosure?](https://consumer.ftc.gov/trouble-paying-your-mortgage-or-facing-foreclosure)
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