Homeowners facing foreclosure have several alternatives to short sales that can better protect their credit and equity. Options include loan modification, refinancing, forbearance, and repayment plans, all aiming to keep you in your home. If retaining the home isn’t feasible, a traditional sale or deed in lieu of foreclosure are better than a short sale or foreclosure. Bankruptcy is a last resort.
What is a Short Sale and Why Consider Alternatives?
A short sale occurs when a homeowner sells their property for less than the outstanding mortgage balance, with the lender agreeing to accept the lower amount as full repayment. While this can prevent foreclosure, it comes with drawbacks:
- It significantly impacts your credit score (typically dropping it by 100–150 points).
- You might not qualify for another mortgage for 2–3 years.
- You may still be held liable for the deficiency balance, depending on state laws and lender policies.
- It requires lender approval, which can delay the sale.
Key takeaway: Short sales can be useful, but they aren’t always the most advantageous or necessary solution. Let’s explore better alternatives.
1. Loan Modification
A loan modification changes the original terms of your mortgage—adjusting the interest rate, extending the loan term, or reducing the principal—to make monthly payments more affordable.
Benefits:
- Keeps you in your home
- Can reduce monthly payments significantly
- Less damaging to credit than a short sale
Example:
Imagine you owe $220,000 on a 30-year loan at 6% interest. Your monthly payment is about $1,320. A loan modification might drop your interest rate to 4%, reducing your payment to about $1,050.
2. Refinancing Your Mortgage
If your credit is still in good shape and you have some equity, you may qualify for a refinance—essentially replacing your current loan with one that has better terms.
Benefits:
- Lower interest rate and monthly payments
- Consolidate debt
- Avoid foreclosure and retain homeownership
Keep in Mind:
Refinancing may not be an option if you’re already in default or have poor credit. Lenders require a decent credit score and a steady income.
Example:
Suppose your current loan has a 6.5% interest rate on $200,000. Refinancing to a 4% rate could save you nearly $300–$400/month, depending on loan terms.
3. Mortgage Forbearance
A forbearance agreement temporarily pauses or reduces your mortgage payments during a financial hardship (such as job loss or illness). It’s often part of pandemic-era mortgage relief programs but still available through most lenders.
Benefits:
- Provides breathing room during financial crisis
- Avoids foreclosure while you recover
Repayment Options:
- Lump sum: Pay missed payments all at once (rarely required).
- Installments: Spread missed payments over several months.
- Extension: Add missed payments to the end of the loan.
4. Repayment Plan
If you’ve fallen behind on payments, a repayment plan can allow you to catch up gradually, instead of facing foreclosure or requesting loan modification.
Benefits:
- Avoids foreclosure
- No need to refinance or sell the home
- Lender-friendly solution
Example:
If you missed $6,000 in payments, your lender may allow you to pay an extra $500/month over 12 months to catch up.
5. Deed in Lieu of Foreclosure
With a deed in lieu, you voluntarily transfer ownership of the home to the lender to satisfy the mortgage debt. This is often considered a last resort when selling the home or modifying the loan isn’t possible.
Benefits:
- Avoids the public embarrassment of foreclosure
- May include cash-for-keys incentives for relocation
- Faster resolution than a short sale
Drawbacks:
- Still affects your credit, although slightly less than foreclosure
- You lose the home and any equity
- Lenders might not accept if there are other liens on the property
Comparative Chart:
Option |
Keeps Home? |
Credit Impact |
Requires Lender Approval |
| Loan Modification | ✅ Yes | Low | ✅ Yes |
| Refinancing | ✅ Yes | Low | ✅ Yes |
| Forbearance | ✅ Yes | Low | ✅ Yes |
| Deed in Lieu | ❌ No | Moderate | ✅ Yes |
| Repayment Plan | ✅ Yes | Low | ✅ Yes |
| Short Sale | ❌ No | Moderate | ✅ Yes |
| Foreclosure | ❌ No | High | ❌ No (forced process) |
6. Selling the Home Traditionally
If you have positive equity, a regular home sale may be your best option. Unlike short sales, you don’t need lender approval, and you may walk away with cash after closing costs.
Benefits:
- Avoids credit damage
- Allows you to retain and use equity
- Quicker than lender-negotiated sales
Example:
- Home Value: $280,000
- Mortgage Owed: $240,000
- Closing Costs: $12,000
Net Equity: $28,000
You walk away with a profit and a clean slate—no short sale or foreclosure needed.
7. Bankruptcy (As a Last Resort)
Filing Chapter 13 bankruptcy can stop foreclosure and allow you to restructure your debts over 3–5 years. Chapter 7 bankruptcy may also delay foreclosure temporarily.
Benefits:
- Legally halts foreclosure proceedings
- Allows structured repayment of arrears
Cautions:
- Long-term credit damage
- Legal fees and court involvement
- Should be used only after other options are exhausted
Final Thoughts
Your home is likely your most valuable asset—and you deserve every opportunity to protect it. Whether you’re navigating temporary hardship or chronic debt, knowing your alternatives to a short sale can mean the difference between financial ruin and recovery.
Instead of panicking, take a moment to explore your choices. With professional support and informed decision-making, you can rebuild, recover, and regain control.