How to Decide between a Short Sale vs. Foreclosure

Short sales offer a significant advantage over having your home foreclosed that could significantly help you in the future.

Defining a Short Sale

Simply put, a short sale describes an agreement between the seller and the bank to accept a much lower amount of money than what is owed on a mortgage, usually as a way to avoid a foreclosure on the property. Used to for decades, short sales have worked well for the banks that save the hassle of losing huge amounts of money through a foreclosure sale.

Do You Qualify for a Short Sale?

While there may be properties in your community sold as a “short sale” not every seller qualifies. The eligibility for qualifying for short sale differs depending on the area, available Government programs, specific lender programs, and many other individual requirements specific to the seller. One of the most common requirements for any short sale is that of "hardship". Any seller applying for a short sale must be able to demonstrate some type of actual hardship or foreseeable circumstances which would affect their ability to meet the obligations of the loan. Hardship can be defined as a job loss, injury, medical condition, or a decrease in wages, for example. The 2nd most common requirement is that the home you currently own must be worth significantly less than the money you owe. Every lender will have a set of qualifying criteria for the available short sale programs, typically listed on their website.

Is Foreclosure a Better Way to Go?

At first glance, having your home foreclosed appears to clean the slate of your financial troubles. However, that is simply not true. A foreclosure on your home could leave you with a huge IRS tax liability while still owing the money to the bank. Even with exemptions from the Mortgage Debt Forgiveness Act, there are situations that you might be taxed on a foreclosure. Always check with your CPA before allowing a foreclosure to happen.

The single greatest advantage of having a short sale over foreclosure is it leaves you in a better financial position. Nearly 100% of all short sales will not cost you any out-of-pocket funds. The process is much simpler than believed, and you can purchase a home in as little as 2 years after the short sale.


Conclusion - Is it better to short sale or foreclose?

Unfortunately, due to the many complications from tax liability, changing laws, and legal and financial consequences it is impossible to make a blanket statement on which one is better in every situation. The best approach is to contact a trusted and experienced real estate professional who has access to a CPA, Attorney, and all the other professionals needed to provide you with  the information to make the best decision. Be cautious of those offering loan modifications or other programs guaranteeing principal reduction, even if offered by an attorney. California law prohibits many of these activities, for more information visit the Bureau of Real Estate website at: Reputable real estate professionals will always provide objective information to consumers and support responsible home ownership.