Short Sale Versus Foreclosure – Which Option is Better For Me?

By Gerald Lucas

Financial setbacks that affect a person’s ability to pay their mortgage are heartwrenching, especially for homeowners with good credit who have always paid their bills on time.  It’s very easy to get discouraged and want to give up when you fall behind on your mortgage payments.  I’ve heard many homeowners say, “I’ve already ruined my credit, it can’t get any worse.”  Unfortunately, it can get worse, because the nightmare does not end when the bank forecloses on your property.  The consequences of letting the bank foreclose are more severe than the consequences of selling your property via short sale. Let’s look at the advantages of each option:  

Advantages of Letting the Bank Foreclose

  • You don’t have to do anything.  This alternative does not require you to take any action.

Advantages of Selling Via Short Sale

  • Results in less damage to your credit both short term and long term
  • Reduces the chances your lender will pursue you for a deficiency judgment
  • Allows you to purchase another property sooner

If your question is whether a short sale and the missed mortgage payments that normally precede it will hurt your credit score, the answer is yes.  However, the credit damage done by a short sale does not last as long nor is the impact as severe as a property foreclosure.  Foreclosures can remain on your credit report in the public records section for 10 years and your FICO score will generally drop further if you are foreclosed on than if you do a short sale.  So, before you give up on a short sale attempt, think about all the things you hope to accomplish over the next 10 years.

If you work out a resolution like a short sale with the bank prior to foreclosure, your lender is less likely to pursue a deficiency judgment against you in court.  Mortgage lenders rarely pursue deficiency judgments against borrowers and they are less likely to do so after a homeowner by pursing a short sale has spared the lender the additional legal fees associated with foreclosing on a property.  There’s no guarantee, but working out a resolution like a loan modification or a short sale reduces the likelihood that your lender will stalk you after the sale of your property.

In most cases, you can purchase another property much sooner when you do a short sale than you can when you are foreclosed on.  “Seasoning” is mortgage industry lingo for the time period that must elapse before a borrower is eligible for a loan.  Short sale seasoning under Fannie Mae guidelines is only two years whereas it is five years for foreclosures.  By pursuing a short sale rather than resigning yourself to a foreclosure, you can reasonably expect to buy another property many years sooner.

If you own a property and miss mortgage payments, obviously, the choice is yours.  Doing nothing may seem easier than taking action–at least in the short run.  Unfortunately, by doing nothing, you give the bank no choice but to foreclose and in most cases you make things worse for yourself.  No matter how bad things get, we owe it to ourselves and our families to do what’s best for us and for them.  Although none of the alternatives you have when you fall behind on your mortgage are ideal, some choices are clearly better than others.  You will feel better if you exert some control over your own fate and do what you think will be best in the long run.

About the author:

Gerald Lucas has been negotiating short sales with banks and lenders across the US for almost 10 years. Mr. Lucas also shares his extensive experience as a real estate investor, guest speaker, coach, and college lecturer. Lucas holds business degrees from Howard University and MIT. He currently is Managing Director of Performance Property, LLC in Jersey City, NJ (

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