What is the difference between a short sale and foreclosure?

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When it comes to real estate, two terms that often come up are “short sale” and “foreclosure.” Both of these terms relate to situations where a homeowner is unable to keep up with their mortgage payments, but they have different implications and outcomes. In this article, we will explore the difference between a short sale and foreclosure, helping you understand the key distinctions between these two processes.

Short Sale

A short sale occurs when a homeowner sells their property for less than the amount owed on their mortgage. In this situation, the lender agrees to accept a lower payoff amount to avoid going through the foreclosure process. The homeowner typically initiates the short sale process by providing the lender with a hardship letter and other required documentation.

Process: In a short sale, the homeowner lists the property for sale and finds a buyer. Once an offer is received, it is submitted to the lender for approval. The lender evaluates the offer and may negotiate the terms or request additional documentation. If the lender approves the short sale, the property is sold, and the lender accepts the proceeds as full or partial satisfaction of the mortgage debt.

Impact: A short sale can have less severe consequences for the homeowner compared to a foreclosure. While it may still negatively impact their credit score, it is generally considered less damaging. Additionally, the homeowner may be able to avoid deficiency judgments, which are court orders requiring the homeowner to pay the remaining balance on the mortgage after a foreclosure sale.


Foreclosure is a legal process through which a lender takes possession of a property due to the homeowner’s failure to make mortgage payments. It is a last resort for the lender when all attempts to resolve the delinquency have been exhausted. Foreclosure can be initiated by the lender or through a court process, depending on the state’s laws.

Process: In a foreclosure, the lender typically initiates the process by sending the homeowner a notice of default. This notice informs the homeowner of their delinquency and provides a specific period to bring the mortgage payments up to date. If the homeowner fails to cure the default, the lender proceeds with filing a foreclosure lawsuit or following a non-judicial foreclosure process. The property is then sold at a foreclosure auction, and if it does not sell, it becomes bank-owned or “real estate owned” (REO).

Impact: Foreclosure has significant consequences for the homeowner. It can severely damage their credit score and make it challenging to secure future loans or credit. Additionally, the homeowner may be responsible for any deficiency balance if the foreclosure sale does not cover the full amount owed on the mortgage. Foreclosure can also result in the loss of the property, forcing the homeowner to find alternative housing.


In summary, the main difference between a short sale and foreclosure lies in the process and outcome. A short sale involves selling the property for less than the mortgage balance with the lender’s approval, while foreclosure is the legal process through which the lender takes possession of the property due to the homeowner’s failure to make mortgage payments. A short sale may have less severe credit implications and can potentially help the homeowner avoid deficiency judgments, whereas foreclosure has more significant consequences and may result in the loss of the property.


– Investopedia: www.investopedia.com
– The Balance: www.thebalance.com
– Nolo: www.nolo.com