Which is better, foreclosure versus short sale of home, is a question I received today.

A foreclosure means that the property went back to the lender. Technically there is a sale of the house. It is offered in public. In some states the offering is done by a court ordered auction in a process called judicial foreclosure. In other states the sale is done privately as a trustee sale.

The lender automatically has a bid in every foreclosure auction. This is called the credit bid. It is for the entire balance of your loan, including all arrears, late charges, attorney fees, appraisal fees, and so forth. More fees than you can believe.

If nobody bids more than the lender's credit bid, then the property goes back to the lender. In some states, those with judicial foreclosure, there may be a period where a homeowner is allowed to buy back the property although this is almost never exercised.

So now the lender has the property. They have clear title to it. The only liens and encumbrances on the property are those that were senior to the lender's loan. Most foreclosures are the first mortgage doing the foreclosure. If there is a second mortgage, they get wiped out. That doesn't mean that the second mortgage holder won't come after you, the former homeowner. They might.

Now, let's compare that to a short sale. In a short sale, you the owner find a buyer, just like you would with a regular sale. Except now you can sell the property for less than the loans on it. You can sell below market value. The buyers you attract can come in and buy the property at a very good price, even in a terrible real estate market. The lender gets all the proceeds. You don't get a dime of the buyer's money.

Now, the lender has gotten at least some of their mortgage paid back. And you are free of the crushing mortgage obligation.

In some instances you can negotiate with your creditor about how they report the short sale. But in any event, you can fight for it to be a "paid settlement" on your credit report, rather than a "foreclosure." You've solved a problem for the lender — they don't get yet another house in their inventory.

It is loads better to do a short sale than a foreclosure. It is better for you and better for your lender.

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This video contains a wealth of information about how to avoid foreclosure by negotiating with your lenders even when they first say "No" or are unavailable. How to do a short sale quickly even when your foreclosure sale date is coming up, how to slash credit card debts outside of bankruptcy, and much more. I always keep your information private and you can unsubscribe anytime.