Trustpilot
Loading...
Loading...Loading...A short sale is a type of real estate deal in which a homeowner sells their home for less than what they owe on their mortgage, and the lender agrees to accept the lower amount.
A short sale in real estate is when a homeowner sells their home for less than what they owe on their mortgage. The lender agrees to accept the sale proceeds as partial payment on the debt, even though the amount is less than the remaining loan balance. Because the sale price is less than the total debt owed, it's called "short."
Why is this important to you? If you own a home and are having trouble making your payments, a short sale can help you get out of it without losing your home. If you're a buyer, short sale listings can be real chances to buy a home for less than the usual market price. No matter what, knowing what a short sale is puts you in a better position to make smart choices.
There is more to short sales than just the sale itself. Because the lender is agreeing to lose money, they need the lender's clear permission. The homeowner must show that they are truly having trouble making their mortgage payments, and the current market value of the property must be less than the remaining mortgage balance. A lender has very little reason to agree if any of those three things are not met.
The Consumer Financial Protection Bureau describes a short sale as a situation where “the lender collects the proceeds from the sale and forgives the difference or gets a deficiency judgment.” That last part is worth remembering because it highlights a key risk. Some states allow the lender to pursue you for the remaining balance even after the sale closes.
For the home buying and selling process, short sales sit somewhere between a traditional sale and a foreclosure. They’re voluntary, which gives the seller more control than a foreclosure would. But they’re not as straightforward as a regular sale because the lender has to sign off on everything, and that approval process takes time.
The short sale process starts when a homeowner realizes they can’t keep up with mortgage payments and their home is worth less than what they owe. That gap between the home’s market value and the loan balance is what makes a regular sale impossible on its own. If you owe $320,000 but your home would only sell for $265,000, you can’t pay off the mortgage from the sale proceeds. You’d be $55,000 short.
The homeowner contacts their mortgage servicer and requests a short sale. This isn’t a phone call and done. The servicer will ask for documentation proving financial hardship. That typically includes a hardship letter explaining the circumstances, recent pay stubs, bank statements, tax returns, and a current mortgage statement. Many servicers also require a comparative market analysis from a real estate agent showing the home’s estimated value.
The hardship letter deserves special attention. This isn’t a form letter or a checkbox exercise. You’re explaining to the lender why you can no longer make your payments, what changed in your financial situation, and why a short sale is the best path forward for everyone involved. Common qualifying hardships include job loss, a significant reduction in income, unexpected medical expenses, divorce, the death of a co-borrower, or a military relocation. Lenders look for situations beyond the borrower’s control, not poor financial planning.
Once the lender reviews the hardship package and agrees the homeowner qualifies, the home gets listed for sale. Here’s where it gets interesting for buyers. The listing goes on the MLS like any other property, but it’s typically flagged as “subject to lender approval.” That flag is your signal that this isn’t a standard transaction. AmeriSave encourages buyers to understand what that distinction means before making an offer, because the timeline and conditions differ from a conventional purchase.
When a buyer submits an offer, the seller and their agent forward it to the lender. The lender then evaluates whether the offer price reflects fair market value. They’ll often order a broker price opinion or appraisal to verify. If the numbers check out, the lender approves the sale. If they don’t, the lender can counter or reject the offer entirely.
This approval step is what makes short sales take longer than regular sales. A typical home purchase might close in 30 to 45 days. Short sales commonly take 60 to 120 days for lender approval alone, and the total closing timeline can stretch to four or even six months depending on the complexity of the deal.
On the surface, it might seem strange that a lender would voluntarily accept less money. But foreclosures are expensive. According to the CFPB, the average homeowner’s cost from a completed foreclosure was approximately $12,500 in inflation-adjusted dollars. And that’s just the borrower’s side. Lenders face their own legal fees, property maintenance costs, and the risk that a foreclosure auction will bring in even less than a short sale would.
So lenders run the math. They use what’s called a net present value calculation to compare the expected recovery from a short sale against the expected recovery from a foreclosure. When the short sale number comes out higher, they approve. It’s a business decision, not a favor. For buyers working with AmeriSave on financing for a short sale purchase, understanding this lender math helps explain why some offers get approved and others don’t.
Lenders also consider the condition of the property, the local real estate market, how far behind the borrower is on payments, and whether the borrower has other assets that could cover the deficiency. A borrower with significant savings or other real estate holdings may have a harder time getting approval because the lender might prefer to pursue those assets instead.
There’s another factor that works in the homeowner’s favor during this process. The longer a property sits vacant during foreclosure proceedings, the more the lender spends on maintenance, property taxes, insurance, and legal fees. In neighborhoods where vacant properties attract vandalism or code violations, those costs climb even faster. A short sale that closes in four to six months typically costs the lender far less in carrying expenses than a foreclosure that drags on for a year or more. That practical reality is what makes many lenders willing to take the short sale route when the borrower qualifies.
People often lump short sales and foreclosures together because both involve a homeowner who can’t pay their mortgage. But the differences are significant, and they can affect your financial future for years.
A short sale is voluntary. The homeowner initiates the process, works with a real estate agent, and maintains some control over the sale. A foreclosure is involuntary. The lender seizes the property through a legal process after the borrower defaults, and the homeowner has little to no say in how or when the property is sold.
Credit impact is another major distinction. A foreclosure stays on your credit report for seven years and can drop your score by 100 points or more. A short sale also damages your credit, but the impact is generally less severe. According to Fannie Mae’s Selling Guide, the waiting period for a new conventional mortgage after a foreclosure is seven years. After a short sale, it’s four years under standard circumstances and as few as two years with documented extenuating circumstances like job loss, serious illness, or the death of a primary wage earner.
From a buyer’s perspective, foreclosure properties are typically sold at auction, often sight unseen and without the ability to conduct inspections beforehand. Short sale homes are listed on the open market, and buyers can negotiate terms, request inspections, and secure traditional financing. The tradeoff is the longer timeline for lender approval.
Let’s say a family purchased their home five years ago for $340,000 with 5% down. Their original loan amount was $323,000 on a 30-year fixed mortgage at 4.25%. After five years of payments, they’ve paid down the balance to roughly $296,000.
Then life changes. One spouse loses their job, and the local market has softened. Comparable homes in the neighborhood are selling for $255,000. That’s $41,000 less than what the family still owes on the mortgage. They can’t sell traditionally because the sale proceeds wouldn’t cover the loan balance, and they don’t have $41,000 in savings to bring to the closing table.
They apply for a short sale. Their lender reviews the hardship documentation, orders a broker price opinion confirming the $255,000 value, and approves the short sale. A buyer offers $250,000. After real estate commissions of roughly 5% to 6% and closing costs, the lender nets about $235,000. That’s $61,000 less than the remaining mortgage balance.
Here’s the part most people don’t think about until it’s too late. When a lender forgives mortgage debt, the IRS generally treats that forgiven amount as taxable income. The lender reports the canceled debt on Form 1099-C, and you’re expected to include it on your tax return for the year the cancellation occurred.
I can’t stress enough how important it is to involve a tax professional early in the process. The rules vary based on your specific circumstances, the type of mortgage, whether the property was your primary residence, and the amount of debt forgiven. Getting advice before you close, not after, gives you the best chance of minimizing your tax exposure.
Buying a short sale can be a solid move if you go in with realistic expectations. The potential upside is a purchase price below what the home would fetch in a conventional sale. The downside is that the process tests your patience, and there are risks that don’t come with a standard purchase.
Short sale properties are almost always sold as-is. The seller is in financial distress, so they’re typically not in a position to make repairs or offer credits. That means the home inspection becomes even more critical. You want to know exactly what you’re buying before you commit, because there’s no going back to the seller for a new roof or a furnace replacement after closing.
Get preapproved for your mortgage before you start shopping. AmeriSave can help you understand your financing options and get a clear picture of what you can afford. A preapproval letter strengthens your offer in the eyes of both the seller and the lender reviewing the short sale package.
You also want to be prepared for the possibility that other liens exist on the property. Second mortgages, unpaid property taxes, or mechanic’s liens can complicate the deal because every lienholder has to agree to the sale terms. That can add weeks or months to the timeline.
Work with a real estate agent who has handled short sales before. I’ve seen buyers get frustrated and walk away from good deals simply because they didn’t understand the process going in. An experienced agent knows how to keep the deal moving and can set proper expectations about timing.
Financing a short sale purchase works the same as financing any other home. You can use a conventional loan, FHA loan, VA loan, or USDA loan depending on your eligibility and the property’s location and condition. The key difference is that the lender holding the current mortgage on the short sale property has to approve the sale price, so there’s an extra approval layer that doesn’t exist in a traditional transaction. Your own mortgage lender will still underwrite your loan based on your credit, income, and the appraised value of the home.
One thing that catches some buyers off guard is the appraisal. If the appraised value comes in lower than the agreed-upon purchase price, your lender may not approve the full loan amount. That’s true for any purchase, but it can feel more frustrating in a short sale after you’ve already waited weeks or months for the seller’s lender to approve the deal. Having a plan for how you’d handle an appraisal gap keeps you from getting blindsided late in the process.
Short sales existed before the housing crisis, but they were relatively uncommon. The real tipping point came during the Great Recession when home values dropped sharply across the country and millions of homeowners found themselves underwater on their mortgages. Between 2006 and 2014, roughly 7.5 million homes were lost to foreclosure, according to the CFPB.
The federal government stepped in with programs designed to speed up the process. The Home Affordable Foreclosure Alternatives program, launched in 2010, created financial incentives for lenders to approve short sales and offered relocation assistance to homeowners. The National Association of REALTORS® worked with lenders, Fannie Mae, and Freddie Mac to push for improvements in the short sale process, noting that these changes “helped stabilize the housing market during the Great Recession by providing additional options for responsible homeowners to avoid foreclosure.”
Today, short sales are less frequent than they were during the peak of the crisis, largely because home values have risen significantly in most markets. But they haven’t disappeared. Job losses, medical emergencies, divorces, and localized market downturns still push some homeowners into situations where a short sale makes the most sense. Markets don’t move in one direction forever, and even in strong overall conditions, individual homeowners can find themselves underwater due to circumstances that have nothing to do with the broader economy.
If you’re working through one of those situations, know that the process is better established now than it was a decade ago, and there are resources available to help. Lenders have dedicated loss mitigation departments, real estate agents specialize in distressed property transactions, and government agencies like HUD offer free counseling services. You don’t have to figure this out alone.
Not every homeowner in financial trouble should pursue a short sale. It’s one option among several, and the right choice depends on your specific circumstances.
A short sale tends to make the most sense when you owe more than your home is worth, you’re experiencing a financial hardship that prevents you from making payments, you’ve explored other options like loan modification or forbearance and they haven’t worked, and you want to avoid the more severe credit and legal consequences of a foreclosure.
If you can still make your payments but are underwater on the mortgage, a short sale probably isn’t your best path. Lenders want to see genuine hardship. Similarly, if your home is worth more than what you owe, you don’t need a short sale. You can list the property, sell it, pay off the mortgage, and pocket the difference.
Here’s a question worth asking: What will your financial picture look like two or three years from now? If the hardship is temporary and you can get back on your feet, other loss mitigation options like forbearance or a repayment plan might keep you in your home. AmeriSave offers resources that can help you evaluate your options and decide what makes sense for your particular situation. If the hardship is more permanent, though, a short sale can give you a cleaner exit than waiting for the foreclosure process to play out.
Timing matters too. The earlier you start the process, the more options you have. Homeowners who wait until they’re months behind on payments and facing a foreclosure notice have fewer negotiating tools available to them. If you’re starting to fall behind and can see where the trajectory is heading, reaching out to your servicer sooner rather than later gives you the best shot at a favorable outcome. The CFPB notes that mortgage servicers are required to discuss loss mitigation options with delinquent borrowers, and a short sale is one of those options.
A HUD-approved housing counselor is another resource worth considering. These counselors can review your financial situation, explain the pros and cons of each option, and help you prepare the documentation your lender will need. The service is typically free and can be especially valuable if you’re feeling overwhelmed by the process.
One of the biggest worries homeowners have about short sales is that the lender might be able to go after them for the difference between the sale price and the mortgage balance. The amount that is left over is called the deficiency. The answer depends a lot on the laws in your state.
In some states, the lender can't go after you for the difference on your main mortgage after a short sale. These states are called "non-recourse" states. Some of them are California, Arizona, and a few other states. If you don't pay back the money, some states let lenders sue you for the rest of it. Texas, where I live in the Dallas-Fort Worth area, has special protections for homestead properties. The rules can be hard to understand, though, depending on the kind of loan and the situation.
The CFPB says you should ask your lender for a waiver of deficiency and get it in writing before you finish the short sale. You can't change what I'm saying. The short sale approval letter should say that your lender will not charge you for the difference. If you don't have that written proof, you could get a surprise judgment months or even years after the sale.
Junior liens and second mortgages are another issue. If you have a second mortgage or a home equity line of credit in addition to your main loan, each lender must agree to the short sale terms on their own. To get junior lienholders to drop their lien, the seller sometimes gives them a small amount of money from the sale. But if they don't think the offer is fair, they can make it harder to come to an agreement. To avoid problems at the last minute, your lawyer and real estate agent should work with all lienholders early on.
AmeriSave can help you see the bigger picture of your mortgage and what options you have for refinancing or changing it before you go through with a short sale. A short sale isn't always the best choice. Sometimes, talking to a knowledgeable loan officer can help you find other options you hadn't thought of.
If you're having trouble paying your mortgage and are underwater on it, a short sale is a real option. It won't fix the problem, but it gives you a way to move forward that isn't as bad as losing your home. Short sale homes can be a good deal for buyers if they are willing to wait longer and are okay with the way the house is now. The most important thing is to be ready, no matter what. Before you sign anything, talk to your lender early, hire professionals who have done short sales before, and know how it will affect your taxes and credit. AmeriSave can help you look into your financing options whether you want to buy something or are trying to figure out what to do next after a financial setback.
Most short sales take three to six months to finish, but cases with more than one lienholder can take longer. The lender approval stage usually takes 60 to 120 days after the buyer makes an offer. Having a real estate agent who has worked with short sales before makes a big difference in keeping things on track. It's also helpful to have your financing in order ahead of time. Getting prequalified through AmeriSave shows the seller's lender that you are a serious, qualified buyer. This can speed up the review process.
A short sale will lower your credit score by 50 to 150 points, depending on how high your score was before the sale and how many payments you missed before the sale. The effect is real, but it's not as bad as a foreclosure, which can lower your score by 100 points or more and stay on your report for seven years. It is possible to rebuild your credit after a short sale. The basics are to keep other accounts up to date, keep your credit card balances low, and give it time. When you're ready to look into buying a home again, AmeriSave's current mortgage rates page can help you figure out where you stand.
Yes. How long you have to wait depends on the type of loan. Fannie Mae-backed conventional loans require a four-year wait from the date of the short sale closing. If you can show that you have extenuating circumstances, you can get the loan with a 10% down payment and wait two years. VA loans require two years of waiting, while FHA loans require three years. These time frames are based on the idea that you will have fixed your credit by the time you get to them. Most of the time, you need a score of at least 620 to get a regular loan. The FHA loan page on AmeriSave's website has information about FHA requirements. These requirements can be more flexible for people who are rebuilding after a credit event.
It depends. The IRS usually counts forgiven debt as taxable income. You might not have to pay anything if the forgiven debt is less than the limit and the short sale property was your main home. The insolvency exclusion is another way you might be able to get help. If your debts were more than your assets when you canceled, you might be able to leave out the amount that was forgiven using IRS Form 982. Before you close, talk to a tax expert. You can get ready by reading about related mortgage topics in AmeriSave's learning center.
In a short sale, the homeowner sells the house to someone else with the lender's permission. A deed in lieu of foreclosure lets the homeowner give the property back to the lender without going through the foreclosure process. Both choices keep the home from going into foreclosure, but a short sale might give the lender more money and give the homeowner a little more power when it comes to negotiating deficiency waivers. The standard waiting time for a new Fannie Mae-backed conventional mortgage is four years, but it can be as short as two years if there are special circumstances. When you're ready to look at your options again, use AmeriSave's prequalification tool.
Yes. Lenders don't have to accept any offer for a short sale. They check to see if the proposed sale price is in line with fair market value, how much they would probably get back through foreclosure instead, and if the borrower really qualifies because of financial hardship. An offer that is much lower than the market value is more likely to be turned down. It's helpful to work with an agent who has experience and knows how to put together a strong short sale offer. A good offer has a preapproval letter, proof of funds, and information about similar sales. Before you make your offer, it makes sense to get prequalified with AmeriSave.
Most of the time, your lender will want a hardship letter that explains your financial situation, recent pay stubs or proof of income, bank statements from the last two to three months, your most recent tax returns, a current mortgage statement, and a real estate agent's comparative market analysis. Some lenders also want you to fill out an authorization form that lets your agent talk to the servicer for you. Getting these papers together before you call your lender can make things go much faster. AmeriSave's educational materials cover a lot of the mortgage ideas that go into putting together a short sale package.
You can, but the way taxes are handled is different. The Consolidated Appropriations Act's exemption for forgiven mortgage debt only applies to qualified principal residence debt. If you don't qualify for the insolvency exclusion, forgiven debt on an investment property is usually considered taxable income. Lenders may also look more closely at short sales of investment properties because the borrower is more likely to have other assets they can use. If you're looking at the situation from the buyer's side, AmeriSave's mortgage rates page can help you figure out what your current financing options are for investment properties.
If the sale proceeds didn't cover the full mortgage debt, a deficiency judgment lets the lender go after you for the remaining balance after a short sale. It depends on the laws in your state whether your lender can do this. Some states don't allow deficiency judgments on mortgages for primary residences, but others do. As part of the short sale agreement, you can ask for a deficiency waiver. Before closing, get it in writing. A housing counselor who is approved by HUD can help you learn about your rights in your state. For more help with mortgage problems, go to AmeriSave's learn page.
This is highly recommended, especially in states that allow deficiency judgments. A real estate lawyer can read the lender's short sale approval letter, make sure that the deficiency is waived in writing, and explain any tax or legal effects that are unique to your state. Some states say that lawyers must be involved in all real estate deals. Even if it's not required, having a lawyer during a short sale can help protect you even more when the money is on the line. When you're ready to buy a new home, AmeriSave can help you with your financing needs.
Fact Checked