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Is a Short Sale an Option to Avoid Foreclosure?


For distressed homeowners, neither a full-on foreclosure nor a short sale is ideal. However, a short sale is a better outcome for both the homeowner and the lender.

The only reason a homeowner would choose a short sale as opposed to a typical transaction is due to needing to sell the home quickly.

A short sale is where the property is listed for sale for less than it’s market value, and this is to attract cash buyers who can buy the home quickly. Real estate investors are the usual buyers of short sale and foreclosed homes.

In this blog article, we explain why a short sale is a better outcome for all parties, i.e. the homeowner and the lender.

Distressed Homeowner

Often what causes a homeowner to miss home loan repayments is not something within their control. There are global conditions that can bring out the chaos in the household. For example, the country’s poor economic performance can see businesses fail, and staff made redundant. Without a job, it’s hard for the homeowner to pay their outgoings, including the home loan.

Lenders want the monthly payments, and if payments cease for more than three months, things get dire. Lenders can and will begin the foreclosure process. Avoiding foreclosure is the best option as it usually results in the owner also needing to declare bankruptcy and clearly, that is not desired by anyone.

Ward Off Foreclosure With A Short Sale

Avoiding the foreclosure proceedings is possible with a short sale. So what’s required by the lender so the homeowner can use a short sale agreement?

The homeowner needs to prove financial hardship which can be due to loss of a job, or a pregnancy, or just a wrong financial decision, e.g. purchase of a new boat or car. Other reasons include divorce, medical incident or death.

No assets is another reason for the lender to agree to a short sale. Remember it’s not an ideal outcome for the lender they as will recoup some of their money on the mortgage, but not all of it.

Short Sale Implications

If you’re facing potential foreclosure, consider the following when looking into a short sale as an option:

Negative Impact on Credit

Short sales will impact your credit. The lender is taking a loss, and you can expect your credit rating to take a dip as a result. But the credit rating drop will be much lower than if the home went into foreclosure.

It’s always best for a homeowner to seek approval for a short sale before the home is foreclosed on by the bank.


Banks Need to Approve the Short Sale

Some prospective buyers are in a hurry and want a fast turnaround so they can get into their new home as soon as possible.

However, during a short sale, the bank will need to approve it, and this process can take some time, therefore, contact your home loan provider before putting the home up for sale. There is a legal process to follow, with many forms and documents to present and complete, including the letter of hardship. The lender needs to see this hardship before accepting less than what is owed on the loan in return.

You will need to provide:

  • Tax returns
  • Pay stubs

An appraiser will also need to come out and value the home against the short sale value. Discussing your hardships with the bank first can make the rest of the process move along smoothly.

You Won’t Profit from the Sale

Short sale approval means that you will not profit from the sale. The bank will even pay the commission fees to the realtor who sells the property on your behalf. Since the bank will sell the home for less than what’s left on the mortgage, they will receive 100% of the proceeds from the sale. Your loan obligations are more than likely to remain, but the amount owed is far less, and with a payment plan, it can be manageable.


The short sale is for distressed homeowners with no better option available to them. While it’s not ideal, it is a better outcome for the homeowner than a full-on foreclosure. The aim is to get through the process, then pick yourself up again, and have a plan to get back on the property ladder.