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Short Sale vs Foreclosure - 10 Common Myths Busted


It’s likely you’ve heard the term “short sale” thrown around quite a bit. But what, exactly, is a short sale?

A short sale is when a bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property. This is not a new practice; banks have been doing short sales for years. Only recently, due to the current state of the housing market and economy, has this process become a part of the public consciousness.

To be eligible for a short sale you first have to qualify!

To qualify for a short sale:

  • Your house must be worth less than you owe on it.
  • You must be able to prove that you are the victim of a true financial hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc… also qualify.

Now that you have a basic understanding of what a short sale is, there are some huge misconceptions when it comes to a short sale vs. a foreclosure. We take the most common myths surrounding both short sales and foreclosures and give a brief explanation. LET’S BUST SOME MYTHS!!

1.) If you let your home go to foreclosure you are done with the situation and you can walk away with a clean slate.  The reality is that this couldn’t be any farther from the truth in most situations. You could end up with an IRS tax liability and still owing the bank money. Let me explain. Please keep in mind that if your property does go into foreclosure you may be liable for the difference of what is owed on the property versus what is sells for at auction, in the form of a deficiency balance! Please note this is state specific and in most states you will be liable for the shortfall, but in some states the bank may not always be able to pursue the debt. Check your state law as it varies widely from state to state.

Here is an example of how a deficiency balance works

If you owe $200,000 on the property and it sells at auction for $150,000, you could be liable for the $50,000 difference if your state law allows it.

Not only could you be liable for the difference to the bank, but in some situations you could also be liable to the IRS! Although there are exemptions (mostly for principle residences) under the Mortgage Debt Forgiveness Act, there are times when you could be taxed on both a short sale and a foreclosure, even in a principle residence situation. Since the tax code on this is a little complicated and I am not a CPA, I advise always talking to a CPA when in this situation as you are weighing your options. Hard to believe?  Well, believe it or not, the IRS counts the difference between the sale and the charged off debt as a "gain" on your taxes. That's right-you lost money and it's counted as a gain! (I didn't make that rule, that’s a wonderful brainchild of the IRS). Banks and the IRS can go as far as attaching your wages. Not to mention if you let your home go to foreclosure you will have that on your credit, as well.

Guess What?  A short sale can alleviate your liability to the bank, in most situations. There are also exceptions to this, but in most cases banks are releasing homeowners from the deficiency balance on a short sale.

2.) There are no options to avoid foreclosure. Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option. Either way, there are more options today than there have ever been to avoid foreclosure.

3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale. Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money. Banks have more foreclosure inventory than ever before, and certainly do not want any more. Banks more than ever welcome short sales. Qualifying for a short sale is easier than you think, you need to have a true financial hardship, or a change in your finances and your house has to be worth less than what you owe on it. Not only do consumers, but banks also now have government incentive to participate in short sales.

4.) Short sales are not that common. At this present time, short sales range from 10-50 % of sales in various markets and it is predicted that in 2012 we will have more short sales than any other year, to date. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class. This has affected everyone from all facets of life. A short sale should be looked at as a helpful tool, not a negative stigma. That is why the government is offering programs that actually pay consumers to participate in short sales. It is not just affecting one community; it is affecting communities and consumers across the nation.

5.) The short sale process is too difficult and they often get denied. Though the short sale process is time consuming; it is not as difficult as the media would have you believe. The problem is that most short sales are denied because of a misunderstanding of the process.  It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a lot of experience, and a special skill set. If you are looking to go the option of a short sale make sure your agent is skilled and experienced in this area.

6.) Short sales will cost me money out of pocket.  A short sale should not cost you any out of pocket money. In fact, you could get between $3000-up to $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. Almost every short sale program now has some type of financial incentive for the home owner, as long as it is a principal residence, and we are even seeing relocation money being paid on some investment/second homes. As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank. In most communities there are also non-profits and HUD counselors who can help you with foreclosure prevention options for free. The only potential cost you could incur is if the bank would not release you from a deficiency balance in the short sale, which is happening less and less now.

7.) If I am behind on my payments, I can perform a short sale any time. The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale. As they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.

8.) I have already been sent a foreclosure notice so I can’t perform a short sale. For the most part just because you received a foreclosure notice or notice of default it does not mean that you do not have time to perform a short sale. The timeline and specifics do vary from state to state, but having done short sales all over the country, I have seen banks postpone a foreclosure to work a short sale option as close as 30 days prior to the scheduled foreclosure auction, but the longer you wait the less chance you have. If you have received a legal foreclosure notice, please reach out to a professional right away. The longer you wait, and the closer you get to foreclosure, the fewer options you have. If you have received a notice to foreclose this means the bank is filing paperwork and starting the process to take legal action to repossess the house. You still have time at this point to prevent foreclosure, but do not hesitate! The closer you get to the foreclosure date the harder it becomes to negotiate with the bank for whichever option you choose.

9.) I was denied for a loan modification, so I know I will get denied for a short sale.  Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the  consumers income.

10.) If I go through a short sale I cannot buy another house for a long time. The time to buy another house depends on your entire credit picture and can vary from 12-24 months. There are even a few FHA programs that allow for a purchase sooner than that. I have worked with clients who went through a short sale and bought another house in less than 12 months.

These are just a few of the common myths surrounding short sales and foreclosure. With the options available today, no homeowner should ever have to go through foreclosure, and hopefully this information can help a few more homeowners think twice before walking away from their home not realizing the possible long term ramifications a foreclosure can have.

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Brandon Brittingham

About Brandon Brittingham

Brandon Brittingham is considered a leading national resource on foreclosure prevention and short sales. Brandon has been involved in over 400 short sales, and is the co-author of the SSC (Short Sale Certified) designation. Brandon has trained over 2000 real estate agents nationwide on short sales and how to help homeowners prevent foreclosure. He has worked with several major lenders to help them develop processes to streamline their short sale and loan modification processes, and has been a Regional Top producer in his area for the last three years and was recently acknowledged by Realty Alliance for being in the top 5% of realtors in North America.

46 Responses to “Short Sale vs Foreclosure - 10 Common Myths Busted”

  1. Myriam Solano May 9, 2012 at 11:09 am # Reply

    Great and professional information regarding the most common issues in Real Estate.

    Thanks So Much for sharing!
    Cordially,

    Myriam Solano
    Broker Associate
    Prudential CA Realty
    Lic. # 01320269
    6349 Riverside Ave
    Riverside CA 92506

  2. Gary May 9, 2012 at 2:38 pm # Reply

    Good comments.  Question your #10.  All the banks I deal with say bank regs won't let you purchase another home for 3 years after the transfer date of the home you did a short sale on.  That is a lot different from what you stated

    • Brandon Brittingham
      Brandon Brittingham May 9, 2012 at 4:13 pm # Reply

       Hey Gary in reply to your comment: The circumstances vary but I have worked on some short sales where the sellers  got another loan in 16-18 months (for Fannie-Freddie) and had another case a friend of mine at Wells did the loan on where the seller was able to buy another home in 60 days after a short sale-it was a FHA backed mortgage on the short sale side and her pay history was great outside of the short sale-it’s not uniform across the board and their entire credit picture was scrutinized. Also smaller regional banks that hold their own portfolio I have worked with have lent to short sale sellers 6 -12 months after the short sale. It’s all case by case and there are many factors and there have been some situations where we were told it was 3 years. What I try to do once a seller goes through a short sale is put them with one of my lending partners and a non-profit credit counseling agency to get them back to the path of homeownership quicker, which has helped for turnarond time in getting them to getting another loan. Hope this info helps!

      • Bobby Fenner October 14, 2012 at 7:53 am # Reply

        Do you know any lenders who have made loans to someone who has perfect credit except a short sale.

        • Brandon Brittingham
          Brandon Brittingham October 16, 2012 at 11:57 am # Reply

          If you see guidelines above, there are a few exceptions that a bank would loan money again to a seller who had good credit put went through a short sale, this of course is case by case basis, but I have seen it happen

          • David Heroux November 10, 2012 at 7:09 pm #

            I have a client doing a FHA short sale in New York and a FHA pre-qual for a home in Florida. They were not late on their mortgage but requested a short sale to move. They are retired and have good credit.So if you have a seller that has an FHA loan, is not late on their mortgage , but can not sell because their value is below satisfying the mortgage, it maybe an option for them!

    • Todd Schindler May 9, 2012 at 4:46 pm # Reply

      That is what I have been told by all off our local banks in St. Louis as well, even the bank I work for - Pulaski Bank. Short Sale or Foreclosure = 3 years until client is eligible for purchase.

    • Tchaka May 14, 2012 at 12:28 am # Reply

       Gary, you are correct however there are exceptions. For example, the rule for an FHA loan is that you must wait for 3 years before you're eligible. At the same time, FHA guidelines allow exceptions for extenuating circumstances. In other words, you must wait 3 years but you don't really have to wait 3 years. ;-)

      • Brandon Brittingham
        Brandon Brittingham May 14, 2012 at 8:23 am # Reply

        You are right with the FHA-and Fannie/Freddie makes exceptions also(they say 2 years with 20% down) but will make an exception- I will post the actual guidelines-or even make it a blog post because it is a little confusing

    • Enid March 5, 2014 at 5:02 pm # Reply

      I received the same information from a banker. He stated that I would have to wait three years for short sale and for foreclosure. It all depends on your credit score.

  3. Chelesemail May 9, 2012 at 6:32 pm # Reply

    "Banks would rather perform a short sale than a foreclosure any day."  That statement is not really true - per a Bank of America Vice-President. Banks actually end up benefiting in a foreclosure over a short sale.

    Also, there is a difference between a short sale and a pre-foreclosure, the latter being the subject of your post. While it is true that short sales are "when a bank agrees to accept less than the total amount owed on a mortgage", in an actual short sale, the owners have not defaulted on the loan.

    There's also differences in the condition of the property, how the bank handles the transaction (because with a pre-foreclosure, the deficiency keeps accruing from month to month) and usually the sellers participation.

    • Barbara May 10, 2012 at 11:59 am # Reply

       I think that the difference here might be bank/servicer vs. investor. Can anybody comment?
      Great info! Thanks

    • Tchaka May 14, 2012 at 12:26 am # Reply

       "there is a difference between a short sale and a pre-foreclosure"

      Not sure of the relevance of this statement. A pre-foreclosure is the time period between the lis pendis and the actual foreclosure.The vast majority of short sales occur with a home in pre-foreclosure status. So while yes, there is a difference, that difference isn't important.

  4. WILDCHILD May 17, 2012 at 2:17 pm # Reply

    I'm in realtor in CA how do i get my clients 30k for doing a short-sale?

    • Brandon Brittingham
      Brandon Brittingham May 17, 2012 at 2:33 pm # Reply

      It is investor and servicer specific-friend me through facebook and send me an email so I can give more detail has it is to hard to explain through a blog response

  5. Orange County Short Sale June 13, 2012 at 8:05 pm # Reply

    When trying to decide whether a short sale is right for you
    don’t be fooled into making the decision under false hopes that your credit
    will not be impacted all that much. The biggest advantage in a short sale is
    the shortened time frame in which you will be able to purchase a home in the
    future.

  6. Ryan July 1, 2012 at 5:01 pm # Reply

    Very useful information and great blog! On a side note, I have had a short sale where the homeowners were current on their mortgage, it was a different situation though. They had inherited the home but didn't want it. I called the lender and told them, you can short sale it or foreclose, what do you want to do? They chose the Short Sale route, and on this deal Chase had sold off the first to BofA so you know they made a nice chunk of change. Quickest approval I have ever received!!!

    Ryan Doll
    949-378-9971
    http://www.ShortSaleOrangeCounty.net
    Lic. 01838259

  7. bb August 16, 2012 at 8:24 am # Reply

    if my house is in foreclosure, can a family member buy my house in a short sale?I have an attorney.

    • KCMcrew August 16, 2012 at 10:43 am # Reply

      @c82de1df252ad7745d5c383ea932b1be:disqus, banks are concerned about fraud in the short sale process and therefore require an "arm's length transaction". Be transparent with the bank and see what they think. And of course, check with your attorney before you do anything.

  8. Bobby September 24, 2012 at 10:51 pm # Reply

    Great comments except #10 is a little different from the common information in the mortgage industry. Who are the lenders lending within 2 years?

  9. Heather Heslip Alexander October 2, 2012 at 2:44 pm # Reply

    How do I find out what my state laws are on the subject. I have 2 mortgages because I had no down payment. My house is worth less than half of what I paid for it and my mother is going to deed me her house. I want to make sure they can't try to take her house from me and that I won't have to repay the mortgage companies. I know this is complicated by having 2 mortgages. I'm in Michigan. Any advice. Our financial situation has changed drastically since we got the mortgages.

    • realtygirl January 5, 2013 at 1:57 am # Reply

      Check with an attorney and CPA to know the laws in your state. The mortgages on your house are only collateralized by your house, not by anything else you own. However, if you need to find out what the deficiency laws are in your state to know if the bank can get a judgement against you for the difference between what you owe and what they can sell the house for. Talk to a qualified real estate agent also.

    • realtygirl January 5, 2013 at 1:58 am # Reply

      You can usually look up deficiency laws in your state by search engine online.

  10. Moni November 4, 2012 at 2:30 am # Reply

    My husband short sold his condo in Dec of 2010. The bank put a KD, charge off on his credit report that will stay on there until 2017. He recently applied for a mortgage and was told he will not be able to get a mortgage until 2017. We thought that a short sale was better than a foreclosure but apparently not. He was never behind on payments. I am thinking something went wrong during the short sale? What do you think?

    • realtygirl January 5, 2013 at 1:54 am # Reply

      Something is very wrong. Find a qualified, legit expert (maybe an attorney) to dispute the "charge off" on his credit. We have all got to do our part to challenge what these banks have done to us and continue to do to us. A short sale should not affect his FICO more than a few to 100 points and should impact his record 2 or 3 years.

  11. jean November 5, 2012 at 2:02 pm # Reply

    I was "approved" for a short sale. After over a year, and 40 showings, the bank refused the one offer made on the house. Being in PA, my experience is, "Don't bother trying to work with a bank. Just relax, and get rid of your liability! Mortgages are bad for the family, and the economy at large, anyhow. Debt should never be defined as a good thing.

  12. Feel Cheated November 16, 2012 at 4:36 pm # Reply

    I just went through a short sale at the end of September, but because I had an FHA loan, all I got was $750 for the short sale. I was originally told I'd get $8,000 and that my attorney had been able to get someone else $15,000 for a house she hadn't paid on in years. Why couldn't I get that kind of money just because I had an FHA loan? I'd paid on the house for almost 20 years before I went deficient. Having an FHA loan, I had to pay PMI with every payment over and above my loan amount - it's not that I got a great break when I got the house, so why do they exclude me from getting extra money?

    • Brandon Brittingham
      brandon brittingham November 19, 2012 at 11:37 am # Reply

      FHA guidelines have been for a long time they pay $1000 or $750, in relocation to get the $1000 you have to settle in a certain amount of time. It is just the guideline they have always have, some of the other investor's and banks pay out the bigger relocation when it is not a FHA backed mortgage

  13. Dawn December 10, 2012 at 10:57 pm # Reply

    I live in New york, ans have Citi Financial as my lender, I just was served with Foreclosure papers, I was in the process of a Modification, Should I still send in all the paperwork, for the Modification?, My next step was considering a Short Sale, I am not sure really what to do?????

    • Stephanie Casiano December 28, 2012 at 2:06 pm # Reply

      My company has a separate division just for helping families with Short Sales. Give me a call if you want me to see what is the best way to handle your situation.

  14. Everett Scott December 17, 2012 at 10:54 pm # Reply

    Short sales are becoming a nightmare to close, wish the process could be simpler.

    • realtygirl January 5, 2013 at 1:47 am # Reply

      7 months into it with Citibank...4 loss mitigators fired or quit...CEO of course quit...they ordered 3rd bpo...seller now in default...buyer hanging on by a thread...Citi is pure chaos

  15. Ida Bear December 27, 2012 at 5:10 pm # Reply

    Brandon, YOU ROCK! Thanks for the insight

  16. Laura Bordenkecher March 7, 2013 at 8:30 pm # Reply

    We live in a home that is the subject of a short sale/foreclosure proceeding. We signed a six-month lease about seven months ago. The owner/our landlord is living somewhere else. At this time, the house is listed for sale as a short sale. We want to continue living in this home until it is sold. Currently, there is an offer to purchase the home by a home rental company. We have spoken to them and they are willing to rent this home to us provided their offer is accepted and they are the purchasers of this property. A letter arrived today addressed to the owner/landlord indicating that the lending bank was moving ahead with the foreclosure proceeding. Does this nullify the short sale? Can we assume that the offer to purchase on the short sale has fallen through and so now this property is subject to foreclosure and we might have a pretty short window of time to pack our things and get out? HELP!!!!

  17. Lizzy March 27, 2013 at 8:56 pm # Reply

    Dear Brandon,

    You spell PRINCIPAL, as in PRINCIPAL RESIDENCE : P R I N C I P AL.
    Principal is an adjective that means "main or chief or central."

    A PRINCIPLE is a noun; it is a belief or assumption.

    • VLizzle October 4, 2013 at 4:33 pm # Reply

      Get over yourself - you are NOT the grammar police!

  18. Leanne April 18, 2013 at 3:56 pm # Reply

    My mom is/was trying to sell her townhouse and the inspection report came back with major issues with her house. The problem is that 4 units are attached to her house and even though she had the foundation worked on, the other four units refuses. There are roofing, structural problems with the house and she just wants out. She won't be able to sell in its current condition and is retired. She doesn't need to buy another house because I'm taking her in. Would a short sale work for her? Better suggestion?

  19. val April 18, 2013 at 7:58 pm # Reply

    Brandon, can I ask you a question? We short sold on 8/12, Underwater and did not want not stop making payments but did. Fortunate for us, we have a private lender and purchased a new home and want to refinance, but don't know if we have to wait the full 2 years to try. Income is great and fica is 680. Is it possible to get a refinance loan. Live in CA.

  20. Lois Vanderski October 17, 2013 at 7:06 pm # Reply

    I own a house in NJ. It's been up for sale since July 2013, no buyers. My husband died suddenly in August 2013. I am current on the mortgage. Responses from my realtor is that I may owe more than the house is worth. We originally listed the property at $499,000, have reduced it to $399,000, I owe $354,000. What should I do? The house costs me $3000 per month (principle, taxes, ins, utilities). The house is empty. My monthly income from social security is $1800 before insurances, rent, food, etc. I moved to SC after my husband died & am staying with my daughter. My question; should I continue to pay the mortgage or is foreclosure an option, I don't qualify for short sale because I received life insurance (without it I could not pay the existing mortgage). My husband & I had excellent credit, but if I stop paying the mortgage, my credit rating will suffer.

    • Steve Harney October 17, 2013 at 9:50 pm # Reply

      Dear Lois,

      My heart goes out to you. Your situation is such that I would get legal counsel immediately. Perhaps your real estate agent can suggest an attorney. We are not close enough to your entire situation to truly help. Sorry!

      Steve Harney

  21. confused December 24, 2013 at 2:17 am # Reply

    I live in Orlando. I'm in the middle of a short sell. But I received a death benefit check & the will states I'm required to pay his debts and the remaining is mine to keep. How does this affect the short sell?

    • Steve Harney December 24, 2013 at 2:14 pm # Reply

      With the many changes taking place in the way banks are handling distressed properties, I suggest you get legal counsel on this.

  22. Joe Yorke March 21, 2014 at 9:57 am # Reply

    I have already received a loan modification a few years back can I still qualify for a short sale?

  23. Martin June 13, 2014 at 4:39 pm # Reply

    I did a short sale almost 3 years ago. I am in the process of getting a 15 year fixed conventional loan. On the application there is a question that says, "have you been in foreclosure or deed in lieu of if the past 7 years?" I say no because I have not. A short sale is neither of these things. My loan officer is saying I have to say yes and I completely disagree? Who is correct here?

  24. Ross July 25, 2014 at 4:50 pm # Reply

    When putting an offer on a forclosure. Does it matter if you are the 1st offer or the 6th?

  25. Mary July 29, 2014 at 8:28 pm # Reply

    Husband passed away, I am unemployed and have been accepted for short sale. I did receive a life ins in check in which I used part of it to pay funeral arrangements. Can the bank come after the rest ?

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