Many homeowners have asked: which is better, to foreclose a property or to shortsell it? Below are some advantages and disadvantages of both options, when a borrower is delinquent in their mortgage payment and refinancing the mortgage is no longer an option.

A short sale or a discounted payoff means that the existing lender of the property being sold is accepting less than the total amount of mortgage due. For instance, if a homeowner owes $300,000 in the bank and the home is worth only $250,000, the homeowner is short $50,000, excluding costs to close the sale such as real estate commissions, recording and legal fees. Homeowners who decide that their home will not sell at the price equal or greater than their mortgage loan balance wonder if they should do a short sale.

To avoid going into the costs of foreclosing a property, some lenders will allow a short sale by letting a buyer purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage.

The steps to take when doing a short sale are:

1. The Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.
2. The agent finds a buyer who makes an offer for less than the amount of the mortgage.
3. Seller accepts the buyer’s purchase offer.

With short sale procedure, potential homebuyers will make appointments to view the home. Some will make lowball offers, agents might hold open houses and, in general, a seller’s life will be disrupted, all in the hopes that a buyer will buy the home. Sellers then wonder whether letting a property go into foreclosure would be easier and smarter than going into a short sale.

With a foreclosure, and depending on state laws regarding foreclosure, a seller could stay in the property, essentially rent free, for four months to a year before being forced to vacate their home. The homeowner will have an opportunity to save all the monies that were due to be paid for the mortgage, allowing them to have funds available to transfer to their next home. This advantage alone does not mean a foreclosure is better.

Our research indicated that both options affect the seller’s credit. A seller will take as much big hit on their credit report by going through foreclosure than giving the lender a deed-in-lieu of foreclosure. In foreclosure or deed-in-lieu of foreclosure as well as short sale, a seller’s credit score could drop by as much as 300 points. If the initial credit score is 700, expect the credit score to drop to 400.

The effect of foreclosure is the inability of a seller to obtain a mortgage to buy another home until after six to seven years. On the other hand, a seller who sold his/her home through a short sale will likely be able to buy another home in two years.

Bottomline, if a seller decides to buy another home in the future, it will take a shorter time to do just that if he did a short sale, rather than foreclosed his previous home.