Living Frugal
Short Sale Or Foreclosure - What's the Better Option?

Short Sale or Foreclosure

In today's real estate market, the short sale may not be anything other than a necessity. A short sale is a viable solution and is beneficial when weighed against a foreclosure or bankruptcy. A lender knows it is in their best interest to accept a short sale versus a foreclosure.

If you are underwater on your home, you could qualify for a solution known as a short sale. The solution is both legal and the lender will have to approve it.

The short sale is basically where you negotiate the sale with your lender to accept the sale of your property to a third party for less than what you owe on your mortgage.

Short Sale Definition

A short sale is an agreement between you, your lender and a third party that wants to buy your home at a lesser price than what you owe on the outstanding mortgage.

The lender accepts less than the loan amount owed to avoid a foreclosure.

The short sale also benefits the buyer as it gives them a discounted price on the home.

Once all terms are agreed upon, the buyer would then purchase the home the same as any other real estate transaction.

Before agreeing to a short sale

Understand the lender's loan default options as it relates to the forgiveness of debt, the tax consequences, the lender's procedure for short sale processing. This can help you determine if a short sale or foreclosure is the better option for your personal situation.


A short sale may not discharge all your debt. Make sure you have it in writing that the debt is forgiven.

Even if the lender agrees to the short sale, it is imperative that you understand and have it in writing that your debt is forgiven. If not, the lender could require you to pay the difference. The outstanding amount could result in a huge collection action against you.

Documentation Required

The documentation required will depend on the lender. You must have the necessary documentation that you are incapable of paying the loan.

If you have the money to pay the deficiency, a lender will not allow a short sale.

This includes retirement funds so if you have 401K, make absolutely sure to fully disclose and have the proper documentation of what you've agreed to in the short sale.

Otherwise, they could require you to dip into your retirement to pay the difference between what you owe and the short sale amount.

What if I have equity in my home?

If you have quite a bit of equity in your home, the lender or bank may opt to continue with a foreclosure.

If you have a considerable amount of equity in your home, you most likely do not owe more than your home is worth.

In this case, it is better for you to sell your home at market prices if there's any possible way. 

If not, the bank most likely will proceed with the foreclosure and sell it at market prices.

However, if the market in your area is flooded with foreclosures, the lender may entertain the idea of a short sale.

Which is worse for my credit score, a short sale or foreclosure?

Unfortunately, one of the short sale consequences is a negative impact on your credit score.

However, when making a decision on short sale or foreclosure, your credit score is impacted more during a foreclosure or bankruptcy.

Your credit report may reflect a note stating that the debt was settled for less than originally owed". 

Can I do a short sale if I'm in bankruptcy proceedings?

No. A lender will not consider a short sale if you are in the middle of a bankruptcy filing. Negotiation between you, the lender and buyer is not allowed in a bankruptcy.

Are there any Tax Consequences of Short Sale?

Most definitely. The lender is taking a loss on your property in a short sale and they can report that amount on a 1099.

This makes you responsible for paying taxes on the amount of debt forgiveness allowed during the short sale. Whether it be a short sale or foreclosure, you could still have tax liabilities.

Would a lender agree to a short sale or foreclosure?

It's in all parties best interest to agree to a short sale. You are relieved from a mortgage you can no longer afford. The bank or lender avoids foreclosure proceedings which can be costly and the buyer of your home gets a discounted price. When it comes to a short sale or foreclosure, a lender will prefer a short sale.


As with all things, there are plenty of scams that promise to stop a short sale or foreclosure but there will be fees involved. 

If it sounds too good to be true, then it is. Here are some warning signs of potential scams.

  • Guarantee to stop foreclosure proceedings.
  • Promises you that you can buy the house back at a lower price.
  • Any fees involved is a sure sign of a scam.
  • They instruct you not to contact or work with your lender.
  • They ask you to transfer the title or lease of the property.
  • Request that you execute a power of attorney to them. BIG NO NO

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