Difference Between Short Sale and Foreclosure

Reader Question: What is the difference between a short sale and a foreclosure?

The difference is that a short sale is a technique used to avoid a foreclosure. So they are two separate but related things.

Through a short sale process, the mortgage lender agrees to accept less than the full amount the homeowner still owes on the mortgage. They do this to sell the home quickly and cut any further losses. The first question most people ask is, "Why would a lender accept less than what is owed to them?" Here's the answer:

The lender has two motivations: (1) to get the non-performing loan off their books as quickly as possible and (2) to avoid a full foreclosure process (which can be expensive and time-consuming). Selling the home for less than market value is a way to expedite the sale, because investors are quick to snatch up such homes.

The homeowner's motivation, of course, is to avoid having a foreclosure on his or her credit (which will make it harder to get a loan in the future).

So the short sale is used so that both parties may avoid the headache, hassle and expense of a complete foreclosure. In such scenarios, it's the closest thing to a "win win" that both parties can achieve.