Explore 10 key reasons why a short sale might be a better choice than foreclosure.

No homeowner anticipates facing foreclosure when signing for a new home. However, the financial downturn and the collapse of the real estate market led many homeowners into the unfortunate path of losing their homes. The foreclosure process is often lengthy, stressful, and can significantly damage one's savings, assets, and credit. It's a daunting experience.

An alternative exists for some homeowners—a short sale. In this process, the bank allows the homeowner to sell the property for less than the owed amount. The homeowner partners with an agent to list the house, usually at a much lower price. The aim is for the sale to help the lender recover most of what is owed, saving them the costs of a foreclosure suit and the possible long-term financial consequences of owning an unsellable foreclosed property [source: Foust].

A short sale doesn't erase the borrower's debt from the original mortgage, but it can be a more favorable option than going through a full foreclosure.

Let’s explore 10 reasons why a short sale might be a better alternative to the long and exhausting foreclosure process.

10: It can help safeguard your credit.

From the lender's point of view, it's better to recover part of the mortgage loan rather than accept a total loss. As a result, instead of foreclosure, banks often prefer to agree to a short sale, which can be a win-win for both the lender and the homeowner.

A common concern for homeowners is whether the bank will pursue a deficiency judgment after a foreclosure. To recover the difference between the sale amount and the loan balance, the bank may sue the homeowner. This deficiency judgment will show up on the homeowner's credit report and negatively affect it, just like a foreclosure would [source: Experian].

Instead of engaging in expensive and potentially lengthy legal proceedings, banks often choose to minimize their losses when homeowners are unable to meet mortgage payments due to hardships like divorce or job loss. The reduced balance owed helps lighten the financial burden on homeowners while preventing significant damage to their credit.

9: It helps avoid foreclosure.

A foreclosure on a property harms the homeowner in many ways and negatively impacts both the lender and the broader housing market. The homeowner's credit score takes a hit, making it tough—sometimes impossible—to secure financing for future purchases like a home, car, or major item. This exclusion from major consumer markets can persist for years, hindering economic activity. Foreclosures are also a financial loss for banks. The reduced auction sale price combined with the operational costs associated with the foreclosure process typically leads to a net loss for the bank [source: Experian].

Foreclosure also takes a toll on the housing market, leading to a decrease in home values. A 2010 report by the Federal Reserve Bank of Cleveland found that not only do foreclosed homes lose value, but they can also cause properties within a 260-foot radius to lose up to 1 percent of their value [source: Hartley]. Additionally, foreclosed homes are often poorly maintained, stay on the market longer, and create challenges for homeowners with good credit who are trying to upgrade to more expensive properties.

Thus, preventing foreclosure is in the best interest of everyone involved.

8: It can reduce your financial burden.

The average legal cost for a homeowner going through foreclosure is approximately $7,500, according to the U.S. Congress Joint Economic Committee. In addition, the costs that pile up during the often protracted foreclosure process can escalate quickly, contributing to a massive financial strain. If the homeowner can’t afford the payments, it could eventually lead to bankruptcy, which carries serious credit consequences for the borrower and significant costs for the lenders as well [source: Christie].

Mortgage lenders don’t always pursue a deficiency judgment in foreclosure situations. It depends on factors like the likelihood of recovering the owed amount. However, if all parties agree to a short sale, a financially stable new buyer may help cover part of the debt owed to the lender. This can ease the original homeowner's financial burden and place them in a more manageable situation [source: Foust].

Similarly, a short sale can significantly reduce the amount a bank may attempt to recover from the homeowner. For instance, if a short sale allows the homeowner to sell a $200,000 property for $175,000, the bank is far less likely to seek a deficiency judgment.

7: It can assist your lender.

As previously mentioned, lenders are also negatively impacted by foreclosures. After the time and cost of sending repeated notices to a homeowner in arrears, lenders face even more expenses as the foreclosure process moves into the courts. Legal filings, hearings, and the accompanying paperwork take both time and money to prepare. After the foreclosure sale, the lender may pursue legal action to recover any remaining debt that wasn't covered by the sale price, further increasing legal costs. Moreover, when the lender takes possession of the property, they are faced with the same challenges any homeowner faces when trying to sell: If it takes too long to sell, it becomes an expensive burden. Even if the sale is swift, the lender must still hire a real estate broker to facilitate the sale of the property [source: Foreclosure.com].

By choosing a short sale, the lender can recoup a portion of the outstanding debt on the property, thus limiting the loss without going through the lengthy legal steps of a foreclosure. In many situations, a short sale reduces the lender's total loss to the point where it becomes more financially prudent to write off the remaining balance rather than pursue legal action against the previous homeowner [source: Foreclosure.com].

6: It can help the housing market.

Many homeowners have invested years into building equity in their homes, only to see it disappear due to the housing crisis. The housing market has become flooded with undervalued homes because of foreclosures, making it hard to find buyers for many of these properties.

The surge in foreclosures has negatively impacted the economy in multiple ways. Property values in neighborhoods with high foreclosure rates decline, and once-thriving communities now have to contend with the spread of blight as vacant, bank-owned homes multiply [source: All About Real Estate Short Sales].

Short sales can play a key role in revitalizing a neighborhood by offering buyers the chance to purchase homes at more affordable prices. By providing an alternative to the complications of a foreclosure sale, short sales can help reduce the number of unsold homes in a neighborhood, which in turn lowers the number of vacant, neglected properties [source: Foust].

Similar to sellers aiming to escape unaffordable properties, potential homebuyers gain from avoiding the bureaucratic hurdles and foreclosure auctions that come with purchasing a foreclosed home. Additionally, because a short sale can often recover a higher percentage of a home's market value than a foreclosure auction, it can prevent home prices from plummeting to unusually low levels [source: Dempsey].

5: It offers opportunities for agents.

Although the short sale process may be less convoluted than a foreclosure, it still involves a series of steps that are more complex than a traditional home sale. The long-term benefits, however, are considerable: choosing a short sale over a foreclosure is likely to put the homeowner in a much better financial position down the line [source: Rapoport].

Real estate agents who dedicate time to mastering the short sale process can tap into a lucrative niche. As short sales continue to increase in many regions, agents can differentiate themselves from their competition and find new opportunities for business, even amidst a slow housing market. More specialized short sale training is now available, and agents who invest in understanding this facet of real estate may see significant returns [source: National Association of Realtors].

4: It can be beneficial for investors.

While no investment is without its risks and nothing can be deemed "foolproof", a knowledgeable investor can profit from short sales, simultaneously helping homeowners who are struggling.

Investing in short sales offers several advantages, such as acquiring properties at below-market prices, the ability to sell competitively, and easy access to property details. Additionally, as short sales gain traction, they present numerous opportunities for savvy investors who can take advantage of the growing trend [source: All About Real Estate Short Sales].

Investors involved in short sales also have the flexibility to negotiate deals with homeowners, such as allowing them to rent the property back or developing a plan that could help them repair their credit.

3: It allows homeowners more control.

Once a foreclosure begins, it triggers a lengthy and taxing process for the homeowner. The mailbox becomes filled with demand letters and overwhelming paperwork, while the homeowner deals with constant communication with the lender's legal representatives.

While a short sale still involves some negotiations, meetings, and paperwork, it generally follows a more straightforward process like that of a traditional sale, as opposed to the stressful and litigious nature of a foreclosure proceeding.

While any real estate transaction can be somewhat stressful, a short sale allows the homeowner to take a more active role in the process, working directly with the bank, the homebuyer, and the real estate agent. Compared to the uncertainty and legal battles of a foreclosure, a short sale is much more manageable for the homeowner, as they avoid being controlled by the bank's attorneys [source: Foreclosure Questions].

2: It helps the seller avoid falling victim to scams.

Facing a foreclosure on a property is already a devastating experience. Unfortunately, dishonest individuals are ready to take advantage of vulnerable homeowners, making their situation even worse.

Over the past decade, numerous highly publicized scandals tied to foreclosures have occurred. These scams typically involve fraudsters who promise to save homes from foreclosure with money-back guarantees or appealing slogans, all while gaining access to struggling homeowners' finances. In the end, many homeowners find themselves in deeper debt and no closer to avoiding foreclosure.

Choosing the short sale route significantly reduces the chances of scammers exploiting vulnerable homeowners. Since the short sale process mirrors that of a typical home sale, homeowners will be interacting with familiar, trustworthy professionals, effectively eliminating the risk of a scam artist getting involved in the transaction [source: Freddie Mac].

1: It can offer the seller peace of mind.

Real estate deals are naturally full of activity between buyer and seller, often leading to stress. However, they pale in comparison to the pressure of a foreclosure. The credit damage, prolonged legal proceedings, and the stigma of foreclosure can be deeply unsettling for homeowners [source: Foreclosure Questions].

While short sales aren't entirely without risk to the seller's credit, they present an opportunity to sidestep the drawn-out and challenging foreclosure process. Though they can't erase all the financial consequences of being unable to afford a home, short sales can provide viable alternatives to legal action and foreclosure's complex, exhausting proceedings.

A short sale can offer homeowners a chance to regain control, reducing their financial strain and giving them an opportunity to begin rebuilding their credit. It can serve as a beacon of hope, providing a fresh start for those looking to move forward after facing financial challenges [source: Foreclosure Questions].