Skip to Content

Short Sales vs. Foreclosures & How They Both Work


When the amount you owe on your mortgage is bigger than your home’s value, it’s said that your mortgage is upside-down. In many cases, the steep drop in a home’s value is the result of a weak economy, causing many homeowners to fall behind on their mortgage payments. It’s a precarious financial position to be in, but there are solutions. One of them is called a short sale.

Short sales are real estate transactions wherein the homeowner makes a deal with the mortgage lender to sell the home for less than its market value. The proceeds of the sale go toward paying off as much of the loan balance as possible—in many cases, mortgage lenders choose to forgive the remainder of the loan.

In cases where a homeowner is unable to make his or her mortgage payments, a short sale can benefit both you and your lender—which is why they might agree to take less than they’re owed. Short-term, it provides the homeowner with the ability to start over, mitigate their credit penalty, and proactively increase their chances of owning another home sooner.

The other benefits of a short sale:

  • It’s voluntary (emotionally, it makes a difference)
  • It looks proactive on a credit report
  • You may be eligible for a home loan immediately (foreclosures have a 5-year waiting period)
  • Short sales do not involve eviction

Below, we discuss the advantages that short sales have over foreclosures and why lenders want to avoid foreclosing at all costs.

The Difference Between Short Sales & Foreclosures

Foreclosures and short sales have roughly the same result: you no longer have your home under your ownership. However, the road to the result couldn’t be more different. For one thing, foreclosure is far more expensive than short sale—especially for your lender. If you’re falling behind on your payments, your lender is likely already gauging the cost of foreclosure litigation: hiring attorneys, filing fees, and other costs. Those are costs you’ll likely need to match if you’re looking to hire a foreclosure defense attorney.

On top of legal fees, the lender will have to take possession of a home that will likely need thousands in repairs or renovations before it’s ready for market. They’ll need to pay for all that work, as well as hire a real estate agent to start marketing the home. On top of that, the lender will need to likely sell the home at a deep discount. All told, banks end up losing tens of thousands of dollars on foreclosures.

And that’s if they sell at all! In many cases, foreclosed homes stay on the market for months—so lenders are left with empty properties that are actively costing them resources to maintain and keep on the market.

Short sales means they might lose a few thousand in the process—but they’ll have proceeds from the sale at the end, not an unused property. Both parties will avoid litigation as well, which is both financially and emotionally costly.

Short Sales & the Local Housing Market

For lenders, short sales are more attractive than foreclosures for another reason: they don’t bring local home values down. Lenders might also have mortgages in the same neighborhood as your home, so a foreclosure would threaten the value of the other real estate properties they’re holding.

Short sales also provide a way for first-time homeowners to enter the home-buying population, which is good for the local economy. Foreclosures have the opposite effect by removing a home buyer.

What You Should Expect

There’s no legal standard to meet for a short sale, so any homeowner “qualifies.” However, lenders won’t agree to a short sale unless they stand to lose more than they’re able to gain from selling under market value. In practical terms, this means you will need to be behind on mortgage payments or have an upside-down mortgage.

At Percy Law Group, our Taunton foreclosure defense attorneys are happy to call your lender and inquire about their openness to a short sale. If they were already considering foreclosing on your property, a short sale might be exactly the solution they’re looking for.

Once lenders receive your short sale proposal, they’ll want to conduct an independent appraisal of your property. Most likely, they’ll want to adjust the agreed-upon asking price to reflect their appraisal—which will be higher, if different at all.

If you have questions about your case, we’re happy to answer! Call (508) 206-9900 for a free consultation on your legal situation.

Share To: