Is a short sale better than letting the house go to foreclosure in Washington?

The answer turns on one Washington rule

National advice on this question usually lands in one place: a short sale always wins. In states where a foreclosed owner can be sued for the gap between the loan balance and the auction price, that’s close to true. Washington handles most home loans differently.

When a lender forecloses a deed of trust through a nonjudicial trustee’s sale, the state’s Deed of Trust Act generally bars it from pursuing the borrower for any shortfall. The house goes to auction and the lender absorbs whatever it doesn’t recover. A short sale carries no such protection on its own. The lender agrees to accept less than it’s owed and release its lien on the house. What happens to the rest of the debt is a separate question, and unless the lender waives the balance in writing, it may be able to come after you for it later.

So in Washington the comparison is closer than national advice makes it sound. The protection has exceptions, including a lender that forecloses through the courts instead, guarantors, and some commercial and investment loans. Whether any of them fit your loan is a question for a Washington attorney with your deed of trust and your notices on the desk.

The two side by side

What you could still owe after each one

After a nonjudicial trustee’s sale, the general answer on the foreclosed loan is nothing more. That doesn’t erase every debt connected to the house. Anything that wasn’t secured by that deed of trust, like a credit card you used for the roof or a personal loan from a relative, stays where it was.

After a short sale, the answer lives in the lender’s approval letter. Read it line by line before closing. Some letters say the remaining balance is waived or that the debt is satisfied. Others only agree to release the lien so the house can transfer, and say nothing about the rest. Silence is not a waiver. If the letter doesn’t say plainly that you won’t owe the difference, ask for revised language before you sign closing papers.

Watch for two other requests that show up in short sale approvals. A lender may ask you to bring cash to closing, or to sign a new promissory note for part of the shortfall. Neither is automatic, and both can sometimes be negotiated. An attorney should see any document that creates a new debt.

Second mortgages and home equity lines

This is where the comparison changes most. The anti-deficiency protection generally belongs to the loan whose deed of trust was foreclosed. If your first mortgage lender forecloses, a second mortgage or home equity line loses its lien on the house, but that lender may still be able to sue on the promissory note as an ordinary unsecured debt.

A short sale needs every lienholder to sign off, and second lenders are often where short sales stall. The first lender usually decides how much of the sale money it will allow to go to the second, and the second has to accept that amount or ask you to make up the difference. When the second lender does agree, get its release of lien and its waiver of any remaining balance in writing, separately from the first lender’s.

If you have a second loan, the short sale can be the better path even when it takes more effort, because it gives you a chance to settle that second debt on paper instead of leaving it open. That’s worth raising specifically with your attorney.

Credit, and how soon you could buy again

Both show up on your credit as serious events, and the missed payments leading up to either one are already there. Don’t choose a short sale expecting your credit to come through it untouched.

The bigger difference tends to be how mortgage programs treat you afterward. Conventional, FHA, and VA loans each set their own waiting periods after a foreclosure and after a short sale, some count documented hardship, and the rules change over time. Before you decide, call a loan officer and ask what the current waiting period would be under each path for the kind of loan you’d want. That call usually costs nothing. If buying again within a few years matters to you, the answer may settle the question.

Taxes on forgiven debt

When a lender forgives part of a debt, the forgiven amount can count as income, and the lender may report it to the IRS. There have been exclusions for forgiven debt on a primary home and for people who were insolvent, and whether one applies depends on the tax law in effect in the year of your sale. A trustee’s sale produces its own tax paperwork too, since it’s treated as a sale of the house. Bring both scenarios to a tax professional before you choose.

Time, privacy, and who picks the move-out date

A short sale asks more of you. The house gets listed and shown, you assemble a financial packet for the lender, and the lender orders its own valuation before it answers. None of that pauses the trustee’s sale on its own. A lender may postpone the sale while it reviews an offer, but that’s the lender’s call, so a short sale should start the week you decide on it. The page on selling before a trustee’s sale covers the packet and how the listing stays discreet.

What you get in return is control of the calendar. You and the buyer agree on the closing date, so you know the day you’re moving and can line up the next place around it. With a trustee’s sale, the date is set in the notice, it can move, and the new owner is entitled to possession 20 days after. What that looks like in practice is in the guide to moving out after a trustee’s sale.

On privacy, the two are closer than people think. A notice of trustee’s sale is already recorded and public. A short sale listing usually notes that the sale needs lender approval, but it says nothing about your notices or your payments, and a yard sign is optional.

When letting the sale happen can be the reasonable choice

Sometimes it is, and it’s fair to say so. It tends to make sense when several of these are true:

• An attorney has confirmed the anti-deficiency protection covers your loan, and the first lender won’t put a waiver in writing.
• There’s no second loan, or the second lender won’t release on terms you can accept.
• The sale date is close enough that a lender review is unlikely to finish in time.
• Health, work, or family leaves no room for showings and weeks of paperwork.

Two other paths are worth a look before you decide. A deed in lieu of foreclosure hands the house back without an auction, and it’s described with the other choices on the options page. And if the house is worth more than you owe, this isn’t a short sale question at all. A regular sale before the auction pays off the loan and puts the difference in your hands, and the worksheet in what you’d walk away with after a sale shows how to estimate it.