How Can a Short Sale Help You Avoid Foreclosure?

If you have fallen behind on your mortgage payments and you are not able to catch up, you may think foreclosure is your only option, but this is not necessarily the case. A short sale can save you from foreclosure and its adverse effects on your credit.

Many times both the homeowner and the mortgage lender would prefer to avoid foreclosure if at all possible. Foreclosure proceedings take a very long time and often cost both parties even more money, which is why a short sale will usually be preferable to foreclosure.

What is a Short Sale?

We’re often asked, “what is a short sale?” A short sale is a way for a homeowner to sell their home to a third party for less than the remaining balance on their mortgage. The proceeds from the sale will go to the lender. After the lender receives the profits, the lender may either forgive the difference owed on the mortgage or the may make the owner pay the difference partially or entirely.

Why Does a Lender Agree to a Short Sale?

A lender will agree to a short sale if the market value of the house is less than the current amount on the mortgage. It is a way for the lender to cut their losses and get as much return on their investment as possible when it’s not possible to receive the full amount.

A lender may prefer a short sale also because it will help them in the future. Many times if a property listed is a foreclosure, a potential buyer is reluctant to take on the property, with a short sale it isn’t listed as a foreclosure and it looks better for the lender and seems more appealing to a potential buyer.

How is a Short Sale Different from a Foreclosure?

Both a foreclosure and a short sale will result in a loss for both the homeowner and the lender, but a short sale can result in less of a loss for the lender and have less of a negative impact on the homeowner’s credit. Here are the main differences between a short sale and a foreclosure.

Short Sale

  • Initiated by homeowner
  • Voluntary
  • Sale of the Property is through a real estate agent
  • It takes a long time to process
  • The homeowner still lives in the house
  • Homeowner can get another mortgage loan in two years


  • Initiated by lender
  • Forced
  • Sale of the property is through either an auction or real estate agent
  • It takes a shorter time to process but will often result in a more significant loss to the lender
  • The homeowner gets evicted from the house
  • The homeowner will have to wait seven years before they can get another mortgage loan

What is the Short Sale Process?

The short sale process begins with the homeowner speaking to their lender and a real estate agent to see if a short sale is possible. If it is likely, the real estate agent and the homeowner will list the property. If a buyer is interested, the seller and buyer create a sales contract, and once the buyer and seller agree to the terms, the sales contract will be reviewed by the lender and be accepted, rejected, or modified.

The lenders’ response is then presented to the potential buyer and is either agreed upon or rejected. Once the contract does get approved, the buyer closes on short sale property, and ownership goes to the buyer. The lender receives all the money from the sale, and the lender will then release the former homeowner from the loan.

Who is Involved in the Short Sale Process?

A short-sale involves the homeowner and lender. It also will require a real estate agent and a potential buyer. When you are trying to decide on a real estate agent, make sure they have experience in short sale real estate. Any home sale is complicated, but because a short sale requires everything to ultimately be approved by the lender, the selling and purchasing of short sale homes is even more complicated.

In addition to a real estate agent, you also should contact a tax professional as well as an attorney. Tax laws are very complicated and can often change. A tax professional can give you the most up-to-date information. A tax professional can also help you avoid surprises down the line. In some cases, debt forgiveness is considered taxable income, so it’s a good idea to ask what taxes you will pay on a short sale.

An attorney will be able to explain to you what your rights are as well as your legal responsibilities in a short-sale. Although, these professionals also charge fees having a professional there to help you through the process so you don’t make a mistake that will cost you far more money and possibly get you into severe legal trouble.