Doubting what's better: short sale or foreclosure

Not sure a short sale is really better than foreclosure.

Somebody told you a short sale is the smarter way to lose the house. Maybe an agent, your servicer, or a forum thread at one in the morning. And you noticed that the person saying it usually gets something if you say yes. So you came to check the pitch for the catch. I would too and it’s only going to help you make the right decision.

The part of the pitch that was oversold

If the version you heard was that a short sale is better for your credit, I have to be straight with you. FICO's own research found no meaningful difference in score impact between a short sale and a foreclosure. The score reads them about the same. Either one can sit on your credit report for about seven years, and FICO says a score can take seven to ten years to fully recover from a serious mortgage event like this. So if someone promised you a gentler number, they oversold it. On the score alone, this is a tie, and your suspicion was earned.

Three years of your life sit in the difference

Now where the two doors actually separate. It is not the score, it is the calendar. For the most common kind of new mortgage, one backed by Fannie Mae, a completed foreclosure carries a seven-year wait before you can qualify again, three with documented extenuating circumstances. A short sale cuts that to four years, two with documented circumstances. Three years of your life sit in that gap. It is the difference between renting until your kids are in a different school and having keys back while they are still in this one. Same hit to the score. Very different road back.

Where the harder door actually earns it

The second place they separate is the piece I think you are most afraid of: the debt that outlives the house. Look at how the auction is built. At a Colorado foreclosure sale your lender has to bid at least its own good-faith estimate of the home's value, minus unpaid taxes, senior liens, and its costs of holding and selling the place, and it never has to bid more than it is owed (CRS 38-38-106(6)). That opening bid is designed around the debt, not around getting you top dollar.

If the winning bid lands under what you owe, the gap is a deficiency, and Colorado does not stop your lender from suing you for it. If they win, that judgment can be enforced for twenty years, and revived to last longer (CRS 13-52-102(2)(a)). I know that lands heavy. It is why the do-nothing door is not the free one.

A short sale does not erase that gap on its own, so I won't pretend it does. What it changes is who is in the room when the gap gets decided. People standing where you are almost always ask the lender to waive the deficiency as a condition of the short sale, and get that waiver in writing, so the sale ends the debt for good. If Fannie Mae owns your loan, it is more than a request: on a completed Fannie Mae short sale the servicer generally has to release you from the deficiency and hand you the waiver at closing. At the auction, nobody negotiates that for you. The number just gets recorded.

One honest footnote. Forgiven debt is generally treated as taxable income for that year. That corner sits behind both doors, and most families hand it to a tax professional rather than guess.

The catch you were right to expect

Now the catch, because you were right that there is one. A short sale needs your lender's yes. It only happens if the servicer agrees to take less than it is owed, and no law makes them agree. The federal rule says they must evaluate you for every option, not that they must hand you any particular one (12 CFR 1024.41(a)). It is also a project. There is a buyer to find, a home to show, and a closing that waits on someone else's approval, while a foreclosure asks nothing of you. That is the honest trade: more work and a yes you cannot force, in exchange for a shorter road back and a real shot at leaving the debt behind.

The harder door does hand you one thing on the way out that the auction never will. On a Fannie Mae short sale of your main home, their policy includes a $7,500 payment toward relocation, unless you are required to contribute cash to the deal or you are getting moving help from somewhere else. This isn’t a promise because different lenders have different rules but it’s important you know it exists.

If a sale date is already on your calendar, the harder door also has a deadline. A complete application, a short sale request included, must reach your servicer more than 37 days before the sale (12 CFR 1024.41(c)(1)). If you miss this window you don’t even have the option to pursue a short sale. And if you aren’t sure when these dates are you can find them on your combined notice.

The check the pitch probably skipped

One check before you pick either door, because you were right to ask this about your home. Both of these doors are built for a home worth less than what you owe. If your home is worth more than the loan, you have been comparing the wrong two things. The federal consumer bureau's guidance is that selling the home is typically better than a foreclosure, a short sale, or [handing back the keys. A regular sale pays off the loan and whatever is left is yours, with nobody's permission needed. Most people check that one number before they agree to lose anything. If you are curious what your options are for your home we at Transitus are happy to show you.

Checking the pitch was the right call

Somebody handed you a sales pitch and you refused to just take it. That instinct has cost you nothing and it may save you years. I hope you keep it. You choosing the ending is better than the ending choosing you.

This article is general information from Transitus, not legal, financial, or tax advice. Foreclosure rules change and every situation is different. Transitus is not a foreclosure consultant (CRS 6-1-1103) and charges no upfront fees. For free help, call the Colorado Foreclosure Hotline at 1-877-601-HOPE or consult a Colorado real estate attorney.