Foreclosure vs. short sale: What’s the difference? 

While selling a home as a short sale is hardly ideal, many experts argue it’s smarter than pursuing more drastic measures like foreclosure. Foreclosure is when a homeowner falls so behind on the mortgage payments, the lender repossesses the house, often against the homeowner’s will, then tries to sell it. If the amount the mortgage company receives from the sale is less than the mortgage debt owed, depending on state laws, the homeowner may have a deficiency judgment. In other words, the now-former homeowner may still owe money on the home loan. 

Foreclosures are less common than short sales. Even during economic downturns like the housing crisis of 2011, the rates rose up to only 3.6%. 

People often confuse foreclosures with short sales, and while they share some similarities in that both typically happen to homeowners in distress, the process and consequences are very different. For one, the foreclosure process typically happens very quickly, since lenders are eager to recoup the costs incurred by the unpaid mortgage. 

Foreclosure also negatively affects an individual’s credit score and credit report. As a result, individuals who undergo it typically have to wait at least five years before they can qualify for a new home loan. 

Bottom line: Foreclosure is scary for good reason. People facing it will want to approach their lender and discuss their options—one of which might be to do a short sale instead.