Sound source localization relies on spatial cues such as interaural time differences (ITD), interaural level differences (ILD), and monaural spectral cues. Individually measured Head-Related Transfer Functions (HRTFs) facilitate precise spatial hearing but are impractical to measure, necessitating non-individual HRTFs, which may compromise localization accuracy and externalization. To further investigate this phenomenon, the neurophysiological differences between free-field and non-individual HRTF listening are explored by decoding sound locations from EEG-derived Event-Related Potentials (ERPs). Twenty-two participants localized stimuli under both conditions with EEG responses recorded and logistic regression classifiers trained to distinguish sound source locations. Lower cortical response amplitudes were observed for KEMAR compared to free-field, especially in front-central and occipital-parietal regions. ANOVA identified significant main effects of auralization condition (F(1, 21) = 34.56, p < 0.0001) and location (F(3, 63) = 18.17, p < 0.0001) on decoding accuracy (DA), which was higher in free-field and interaural-cue-dominated locations. DA negatively correlated with front-back confusion rates (r = -0.57, p < 0.01), linking neural DA to perceptual confusion. These findings demonstrate that headphone-based non-individual HRTFs elicit lower amplitude cortical responses to static, azimuthally-varying locations than free-field conditions. The correlation between EEG-based DA and front-back confusion underscores neurophysiological markers' potential for assessing spatial auditory discrimination.