Short Sale vs Foreclosure: Which Is Better for You?

Updated January 2025 | Get Free Consultation

If you're underwater on your mortgage and can't keep up with payments, you're likely weighing two difficult options: short sale or foreclosure. While neither is ideal, understanding the differences can help you choose the path that causes the least damage to your financial future.

In almost every case, a short sale is better than foreclosure. Here's why, and how to decide what's right for your situation.

The Bottom Line

A short sale typically causes less credit damage, may eliminate deficiency liability, allows you more control over timing, and can help you buy a new home sooner. When possible, short sale is the preferred option.

Quick Comparison: Short Sale vs Foreclosure

Factor	Short Sale	Foreclosure
Credit Impact	50-100 points drop	100-150+ points drop
Credit Report Entry	"Settled" or "Paid for less"	"Foreclosure"
Time on Credit Report	7 years (less visible over time)	7 years (major red flag)
Buy New Home (FHA)	2-3 years	3-7 years
Control Over Timeline	You choose when to move	Evicted on bank's schedule
Deficiency Judgment Risk	Often waived in negotiation	Possible in California
Emotional Impact	You make the decision	Bank takes control

What Is a Short Sale?

A short sale is when you sell your home for less than you owe on the mortgage, with your lender's approval. The lender agrees to accept the sale proceeds as payment in full (or partial) satisfaction of your debt.

How a Short Sale Works

You prove financial hardship to your lender
You list the home for sale at market value
A buyer makes an offer
Your lender reviews and approves the offer
The sale closes, and your lender accepts less than owed
Remaining debt may be forgiven (negotiable)

Short Sale Requirements

Financial hardship: Job loss, divorce, medical issues, etc.
Underwater mortgage: You owe more than the home is worth
Lender approval: Your lender must agree to accept less
Arm's length transaction: Cannot sell to family members

What Is Foreclosure?

Foreclosure is when your lender takes your home because you've defaulted on your mortgage. In California, this is typically a non-judicial process that takes 120-200+ days.

How Foreclosure Works

You miss mortgage payments
Lender files Notice of Default
90-day reinstatement period
Lender files Notice of Trustee Sale
Home is sold at public auction
You must vacate the property

Detailed Comparison

Credit Impact

Short Sale Credit Impact

A short sale typically drops your credit score by 50-100 points. It's reported as "settled" or "paid for less than owed," which is viewed more favorably than foreclosure by future lenders.

Many lenders view short sales as a responsible decision during hardship, which can help when you apply for future credit.

Foreclosure Credit Impact

Foreclosure drops your credit score by 100-150+ points and is reported as "foreclosure" on your credit report for 7 years.

Foreclosure is a major red flag for future lenders and can affect your ability to get credit cards, car loans, and even employment.

Buying a Home Again

Waiting Periods After Short Sale

FHA Loan: 2-3 years (with exceptions)
VA Loan: 2 years minimum
Conventional Loan: 2-4 years
Jumbo Loan: 2-7 years

Waiting Periods After Foreclosure

FHA Loan: 3 years minimum
VA Loan: 2 years minimum
Conventional Loan: 7 years (or 3 with extenuating circumstances)
Jumbo Loan: 7+ years

Deficiency Judgment Risk

If your home sells for less than you owe, the difference is called a "deficiency." Here's how each option handles it:

Short Sale: You can often negotiate with your lender to waive the deficiency as part of the short sale approval. Many lenders agree to accept the sale price as full satisfaction of the debt.

Foreclosure: In California, deficiency judgments are generally not allowed for purchase money mortgages (loans used to buy your home). However, refinanced loans or HELOCs may allow deficiency collection.

California Deficiency Law

California has anti-deficiency protections for certain loans. However, the rules are complex. Consult with a professional to understand your specific liability.

Tax Implications

Both short sales and foreclosures may have tax implications. When a lender forgives debt, the IRS may consider it taxable income.

However, there are exceptions, including:

Primary residence exclusion (check current laws)
Insolvency exception
Bankruptcy discharge

Consult a tax professional for advice specific to your situation.

When Is Short Sale the Better Choice?

Short sale is typically better when:

You want to minimize credit damage
You plan to buy another home in the future
You want to avoid the stigma of foreclosure
You have time to complete the process (60-120 days)
You want to negotiate deficiency waiver
You want control over timing and the process

When Might Foreclosure Happen Instead?

Foreclosure may occur when:

You've run out of time for a short sale
Your lender refuses short sale approval
You can't find a buyer
You've decided not to pursue other options
You're strategically walking away

Not Sure Which Path Is Right for You?

Every situation is unique. Schedule a free consultation to discuss your specific circumstances and understand all your options.

Schedule Free Consultation Call (949) 565-5285

The Short Sale Process in California

Step 1: Qualify for Short Sale

You must demonstrate financial hardship and be underwater on your mortgage. Gather documentation of your hardship (job loss letter, medical bills, etc.).

Step 2: Contact Your Lender

Reach out to your lender's loss mitigation department and request short sale approval. You'll need to submit a complete hardship package.

Step 3: List Your Home

Work with a real estate agent experienced in short sales. The home is listed at market value (not what you owe).

Step 4: Receive and Submit Offers

When you receive an offer, it's submitted to your lender for approval. The lender reviews the offer and your financial situation.

Step 5: Lender Approval

This is often the longest part - lenders can take 30-90 days to approve. Be patient but persistent with follow-up.

Step 6: Close the Sale

Once approved, the sale closes like a normal transaction. Your lender receives the proceeds and (hopefully) forgives the remaining debt.

Short Sale Tips for Success

1. Start Early

Short sales take time. Begin the process as soon as you know you can't keep the home.

2. Work With Experienced Professionals

Short sales are complex. Work with a real estate agent and potentially an attorney who specialize in distressed properties.

3. Complete Your Hardship Package

An incomplete package is the #1 reason for delays. Submit everything requested, completely and accurately.

4. Get Deficiency Waiver in Writing

Before closing, ensure your lender agrees in writing to waive any deficiency. Don't assume - get it documented.

5. Continue Communicating

Stay in contact with your lender and agent throughout the process. Respond promptly to any requests.

Frequently Asked Questions

Is a short sale better than foreclosure for my credit?

Yes, almost always. A short sale typically causes 50-100 points less damage than foreclosure and is viewed more favorably by future lenders.

How long does a short sale take?

Usually 60-120 days from listing to close, though lender approval can add significant time.

Will I owe money after a short sale?

It depends on your negotiation. Many lenders agree to forgive the remaining balance as part of short sale approval. Get this in writing before closing.

Can I buy a house after a short sale?

Yes, typically after 2-4 years depending on loan type. This is significantly shorter than the waiting period after foreclosure.

My lender denied my short sale. Now what?

You can appeal, submit a new offer, or explore other options like loan modification, traditional sale, or deed in lieu of foreclosure.

Get Expert Help With Your Short Sale

As licensed California real estate professionals, we've helped hundreds of homeowners successfully complete short sales. Let us guide you through the process.