Short Sale vs. Foreclosure in New York: Which Is Better for You?
If you owe more on your home than it is worth and you cannot keep up with payments, you may be weighing a short sale vs. foreclosure. Both mean leaving the home. But they are very different experiences, and the choice you make can affect your credit, your finances and how quickly you can start over.
This guide explains the difference between a short sale and a foreclosure in New York, the pros and cons of each, and how to decide.
What is a short sale?
A short sale is when your lender agrees to let you sell your home for less than you owe on the mortgage. The sale money goes to the lender, and the lender accepts it to settle the loan.
You stay in control of the process. You sell the home on the open market, choose a closing date with the buyer, and leave on planned terms. The lender has to approve the sale, and if you have a second mortgage or home equity line, every lender with a lien on the home must agree.
What is a foreclosure?
A foreclosure is the legal process a lender uses to take back a home after missed payments. In New York, it happens through the courts. The lender files a case, a judge issues a judgment, and the home is sold at a public auction run by a court-appointed referee.
You do not control the timing or the price. After the auction, the new owner can begin an eviction if you are still living in the home. Learn more in our guide to the New York foreclosure process.
Short sale vs foreclosure: side by side
| Short sale | Foreclosure | |
|---|---|---|
| Who controls the sale | You, with lender approval | The court and the lender |
| How the home is sold | Open market, to a buyer you accept | Public auction |
| When you move | On a closing date you help set | After the auction, often through eviction |
| Public court record | No foreclosure judgment | Foreclosure case and judgment |
| Effect on credit | Serious, but usually viewed as less severe | Among the most damaging events |
| Getting a new mortgage later | Often possible sooner | Usually a longer waiting period |
| Remaining debt (deficiency) | Can often be waived in writing | Lender may seek a deficiency judgment |
The pros of a short sale
More control. You decide when to list, which offer to accept and when to move. That makes it easier to plan for your next home and your family.
Less damage to your credit. Both a short sale and a foreclosure hurt your credit. But lenders and credit scoring generally treat a short sale as less severe, and waiting periods for a new mortgage are often shorter after a short sale.
A chance to settle the remaining debt. In a foreclosure, if the auction price does not cover what you owe, a New York lender can ask the court for a deficiency judgment within 90 days after the sale (RPAPL § 1371). In a short sale, you can ask the lender to agree in writing that the sale settles the debt in full. Always get this in writing before you close.
No auction and no eviction. You avoid the stress of a public auction and a court eviction.
The cons of a short sale
It takes work and patience. Lenders often take weeks or months to approve a short sale, and they ask for financial documents, a hardship letter and a market price analysis.
Approval is not guaranteed. The lender, and any second lienholder, can say no.
Possible taxes. Mortgage debt that is forgiven can sometimes be treated as taxable income. Ask a tax professional before you sign.
When foreclosure may happen anyway
Sometimes a short sale is not possible. The lender may refuse, the home may not sell, or there may be too many liens. Even then, New York’s foreclosure process gives you time and rights, including a mandatory settlement conference where you can ask the lender to consider a short sale or modification.
What about a deed in lieu of foreclosure?
A deed in lieu of foreclosure means you give the home back to the lender, and the lender ends the foreclosure. Like a short sale, it avoids an auction. Lenders often prefer a short sale first, and a deed in lieu usually requires that the home has no other liens.
Which is better: a short sale or foreclosure?
For many New York homeowners who cannot keep their home, a short sale is the better option. It protects your credit more, gives you control over the move, and can settle the debt. But it is not right for everyone. If you want to stay in your home, explore a loan modification first. See Understanding Your Foreclosure Options.
Help starting over after a short sale
Abraxas Foundation, a nonprofit, works with your bank on the short sale at no cost to you. Homeowners in our short sale program can also apply for a Short Sale Relocation Grant to help with the cost of moving and getting settled in a new home.
Call (929) 346-5734 or contact us for a free, confidential review.
Helpful official resources: NY Courts CourtHelp: Foreclosure and NY DFS Foreclosure Consumer Bill of Rights.
This article is general information, not legal, tax or financial advice. Speak with a housing counselor, attorney or tax professional about your situation.
