Short Sale Or Foreclosure: Which One Is More Profitable For A Bank?

Jan 04, 2024 By Triston Martin

Mortgage lenders will do whatever it takes to get back their money when clients fall behind on their loan payments. There are two possible outcomes: a bank foreclosure and a short sale. Sometimes, the bank may prefer to accept a short sale offer rather than pursue foreclosure.

The main purpose of a bank, like any other company, is to make money. Due to these reasons, a bank may choose to accept a short sale over a foreclosure if the costs outweigh the benefits. However banks are estimated to make 20–30 percent more money on short selling.

What is Meant By Short Sales?

A short sale may benefit everyone in many cases. They make it easier for vendors and lenders to make money and give buyers more chances to invest. Because the short sale process is so complicated, banks take a long time to respond. The bank's primary goal is to maximize its return on the sale, so any offer below the current market value or mortgage balance will almost certainly be rejected.


  • A short sale usually has far more favorable terms than a foreclosure.
  • Most short-sale homeowners need to repair their credit ratings, so they have likely made regular maintenance and utility payments throughout the process.
  • For many people, buying real estate can be stressful, and they don't want to add to the financial stress of the bank.


  • Short sales are riskier because they are often offered "as is." Even if you've gotten an inspection and paid for remodeling costs, the current owner may reconsider and settle the past-due amount to hold onto the home.
  • Before closing on a short sale, you might have to complete additional paperwork, gather facts, and speak to the lender (banks in this case), real estate agents, and possibly others.
  • People facing a short sale may have trouble paying their bills, and their homes may need repairs immediately.


Foreclosure is a legal process by which the person who owns the mortgage (sometimes called the "mortgagee") can take possession of the property secured by the mortgage if the borrower doesn't pay the mortgage. In general, foreclosures are governed by the local law of the property being mortgaged.

The purchase of a foreclosed home is only suitable for some. The lender's goal is to get back most of the property's debt so they lose as little money as possible. Tax liens are sold at municipal auctions to get as much money as possible. Repossessed properties are often sold "as is." Because banks and governments prefer not to take on the role of landlords or restorers, they are often offered "as is."


  • When a homeowner can't pay their bills, their home may be hit with liens and unpaid taxes.
  • These can be bought at a discount at a foreclosure sale.
  • The title to a property is cleared of all encumbrances and liens at the time of a bank foreclosure.


  • When a house goes into foreclosure, the owner usually ignores it or leaves it because they have serious money problems.
  • A foreclosure sale is often the biggest hurdle when buying a home.
  • Potential buyers should be ready to spend a lot of money on the house and any repairs it needs.

Recovery is the top priority for banks.

Banks want to get back as much money as possible; as lawyer Mark Bello says, "the banks would suffer a huge loss if they received the same as they would with a short sale."

A bank won't approve a short sale if they think they can sell the property themselves on the open market for a better return. The bank is less likely to reject the deal if the short sale price is close to the current market value.

From 2006 to 2008, the number of mortgages in foreclosure went up a lot, from 0.6percent to 1.8percent. Eight months after loan modifications were processed, more than 40% were in default or foreclosed.

The market, however, has recovered somewhat since then. A 45% share of foreclosed homes nationwide were caused by loans secured between 2004 and 2008, by Data Solutions' ATTOM data by year.

According to the National Association of Realtors, the number of homes in foreclosure in the United States dropped 8% by the end of 2018, approximated to the start of the year, and 78% lower than the roughly 3 million foreclosures in 2010.

The advantages of a short sale over a foreclosure for banks

As long as the short sale offer is comparable to the property's market value, there is no problem. Therefore, the bank or the lender may accept a short sale offer rather than initiate foreclosure proceedings.

So, it's not likely that the bank will get a bid that matches the property's fair market value via foreclosure. There are exceptions to this; for example, if the asset being foreclosed on is in a place where the asset's value is likely to go up, foreclosure is usually the best choice.

You should be aware that any short sale bid may be the basis for a legally binding real estate agreement between you and the bank. The state's legal system also applies to foreclosures. Before doing anything, everyone involved in a financial transaction would do well to determine their rights and responsibilities under the law.


Even though banks make more money from a foreclosure than from a short sale, the latter may be better in some situations. Foreclosure may be a lengthy and costly procedure, making the bank reluctant to pursue it, but all banks want is to make money. The bank is more likely to approve a short sale offer if the price is close to the property's fair market value.

Related Articles