How Does a Short Sale on a House Work in 2026?
Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.
A short sale is one of the solutions to avoid foreclosure. It’s usually a last resort for a homeowner, while it’s an opportunity for a buyer to purchase a home with a discount.
This article gives general information on what a short sale is, how it works, and its pros and cons for homeowners, including how to choose a qualified real estate agent.
Everything You Should Know About a Short Sale Home
Your current mortgage balance exceeds the “as-is” value of the property. Monthly mortgage loan payments are becoming increasingly more difficult, or outright impossible to pay. You might need to consider a loan modification plan.
You can no longer keep up with the monthly expenses or required maintenance the home needs. You’re physically and emotionally drained.
At this point, your ideal situation would be to just get rid of the home, along with any recurring expenses and the headaches that come with them.
The question then becomes: is this even possible? The answer is: YES. If your situation qualifies, a short sale can be your knight in shining armor.
What Is a Short Sale in Real Estate?
In real estate, a short sale is defined as the sale of a property for less than what is owed on the current mortgage balance. The lender (mortgage company or bank) must approve a short sale before a homeowner can sell the property.
The mortgage lender agrees to take a loss on the property, but all proceeds from a short sale go directly to the lender.
The borrower’s ability to make repayments affects the lender’s decision to approve a short sale. To qualify for it, you need to be able to prove that you are in true financial hardship.
While a short sale isn’t recorded as a foreclosure against your credit history, it can still affect your record. Short sales are also among the common ways to stop foreclosure at the last minute.
How Does a Short Sale Work in Real Estate?
As stated above, the basic meaning of a short sale is when the owner’s lender agrees to take a loss on the property, by accepting less than what is owed on the current mortgage balance.
For a better understanding, let’s take a look at this example:
Due to a recent hardship, John can no longer make his monthly mortgage payments to the bank. On top of this, John’s home is currently worth less than his mortgage balance.
After consulting with a loss mitigation professional, he became aware of his option to sell his home through a short sale.
John’s current mortgage balance owed is $100,000. The “as-is” value of his home is $70,000. After receiving an offer of $70,000 and submitting it to the bank, they agreed to let him sell the home for the $70,000 that it’s worth.
As a result, John was able to avoid the looming foreclosure, as well as restore his peace of mind.
Step-By-Step Short Sale Process for the Seller
Below, we will give you an outline of the short sale process for sellers. For more information, read our guide, Step-by-Step Short Sale Process for Home Sellers, where every step is discussed in detail.
Many of those steps are facilitated by a short sale processing professional, also known as short sale negotiator. Here is what a short sale negotiator does for the seller.
Your action plan to short sell your property:
- Contact a short sale processing company for a free consultation. They will help determine whether or not you’re qualified for a short sale.
You can get in touch with a reputable short sale processor in your location who handles the whole process at no cost to homeowners by filling out our free short sale help form.
The processing company will reach out to your lender and initiate the short sale process. This includes ensuring you are eligible for a short sale and submitting the required hardship/financial documents to the lender.
- The processing company will assign a real estate agent to list your home for sale. If you are selling your house to an investor, it may be one of the local investor-focused realtors.
- An offer is received and submitted to your lender for review.
- The lender conducts an appraisal of the property to determine its current “as-is” value.
- Based on the appraisal, the lender accepts or counters the offer.
- Once a price is agreed upon between the person who is buying a short sale home and the lender, the lender officially accepts the offer and sets a closing date.
- Settlement Day! Consider writing a detailed testimonial for your short sale processing company.
What Happens if I Short Sell My Home?
How Will a Short Sale Affect My Credit?
Before deciding to do a short sale, you should contact a licensed credit professional to discuss the potential implications.
A short sale will result in a negative impact on your credit. However, it is less of an effect than a foreclosure would have.
The actual decrease in your credit score after a short sale will depend on how high or low your score was to begin with.
For example, if your score was in the 750-850 range, a drop of around 120-150 points may be possible. However, if your credit score was in the 650-700 range, you may experience a decrease of around 60-100 points.
So, what does all of this mean?
A drop in a borrower’s credit score resulting from a short sale can make borrowing again more difficult. If your score drops, expect higher interest rates and down payments.
Prior to a short sale, a borrower with a 750 credit score would get a favorable interest rate on a mortgage. Let’s say a 30 year fixed mortgage at 3.75%, for the sake of the example.
After this borrower experiences a short sale, their score may decrease to somewhere around a 600. In this case, some banks will consider this person a “subprime” (riskier) borrower. That same 30 year fixed mortgage may turn into a 4.75% interest rate.
Be also aware that if you have a “subprime” score to begin with, a short sale may result in a lender not granting you another loan for 2-5 years.
For instance, if the borrower’s credit score is a 550, prior to the short sale, he or she will typically not have a sufficient enough score to qualify for a mortgage in the near future.
Once a short sale is completed, the verbiage on your credit report will read “settled for less than the full amount”, or some sort of variation.
This lets future financiers know that you at least made an attempt to resolve as much as the debt as possible, rather than just letting the property go into foreclosure.
How Long Does a Short Sale Stay on Your Credit?
A short sale will stay on your credit for an estimated 3 to 7 years. The range will depend on numerous factors, including your immediate action steps, whether or not you seek help from a credit professional, and your current debt-to-income ratio.
Let’s take a look at this example:
Ray was underwater in his home and decided to perform a short sale. He has a solid credit score of 650. Once the sale was complete, Ray’s score dropped 150 points, leaving him at 500.
Determined to qualify for another mortgage in the near future, he hired a professional credit counseling agency to work on his score. The credit repair company was able to guide Ray through the process, allowing him to qualify for another loan 3 years later.
For more information on this subject, read my other article: How Does a Short Sale Affect Your Credit?
Will I Be Able to Get Another Mortgage After the Short Sale Is Completed?
Your credit and financial history will be impacted by a short sale. However, it will be affected to a lesser extent, compared to a foreclosure.
As a result, you will be eligible to purchase another home in a much shorter time frame, compared with if the property was foreclosed upon.
You can usually expect the average waiting time to be around 3-7 years. This will depend upon a few factors, such as your action steps to improving credit, paying bills on time, and deciding on whether or not to consult with a credit counseling company.
Loan options after a short sale will vary, but they are out there.
Here are two potential loan options, after experiencing a short sale:
Non-QM Loans
A Non-QM mortgage stands for a non-qualified loan. These loans do not meet the requirements of the Consumer Financial Protection Bureau’s (CFPB) qualifications for Qualified Mortgages.
These loans have more flexible underwriting requirements, which make good options for those who experienced a short sale.
Government-Backed Loans Such As Fannie Mae & Freddie Mac
A government-backed loan is a mortgage that is subsidized by the government. Lenders are often able to offer borrowers favorable terms on these loans, as the government protects them against default.
If a borrower provides a written statement of why the short sale occurred, the lender may approve the loan within 2-4 years after the short sale. Banks typically prefer short-term financial hardship (e.g., divorce, job loss) over long-term difficulties as the reason for a short sale.
FHA Loans
An FHA mortgage is backed by the Federal Housing Administration and designed for borrowers with low to moderate income.
Unless you were up-to-date with your monthly mortgage payments at the time of the short sale (this is unlikely), you may have to wait up to 3 years to secure an FHA loan.
Similar to the government-backed loans, if you are able to show the short sale occurred due to a short-term hardship or event, an FHA mortgage may be an option sooner.
Are There Tax Implications With a Short Sale?
Before deciding on a short sale, you should contact a licensed tax professional in your area to discuss potential implications.
A short sale may still leave the homeowner liable for the remaining mortgage payments, depending on state laws.
The tax ramifications differ widely and depend on whether the home is used as a primary residence or an investment property, along with other factors.
When the lender chooses to waive their right to collect a deficiency judgement (come after the excess funds you owe), they will issue you a “cancellation of debt” tax form.
The tax form is called a 1099-C, and you must file it with the Internal Revenue Service (IRS). Mostly any outstanding debt that is canceled, forgiven, or discharged is considered as capital gains and becomes taxable income to you, according to the IRS.
The 1099-C document is broken down into several sections, including the creditors & debtors contact information, the date of the event, the amount of debt discharged, interest accrued, description of debt, fair market value of the home, etc.
Here’s an example of where a 1099-C would apply:
Paul was just approved for a short sale on his property. His overall mortgage balance was $200,000 and his house sold for $150,000. The deficiency balance was $50,000.
The bank chose to waive their right to collect the deficiency balance from Paul. Hence, they issued him a 1099-C because the excess $50,000 was now considered taxable income.
In the case above, Paul is happy to accept the 1099-C. He would much rather do that than have to deal with possible judgments, wage garnishments, etc. resulting from the $50,000 deficiency balance.
Thoroughly Check and Keep Your Documentation
On another note, when the short sale is completed and the transaction is closed, it is very important that the seller keeps and stores all of their short sale approval documentation, as well as the settlement paperwork.
As the seller of a short sale, keep all documentation in a place where it will be easily accessible, if needed.
Think about it: the people that work at the bank and are responsible for filing and recording your short sale are only human. Humans make mistakes!
It is very possible that the lender rep accidentally reports your home as a foreclosure instead of a short sale.
Don’t panic! As long as you have all of your short sale and settlement documentation handy, you’re fine! I highly recommend keeping copies of all paperwork. At a minimum, here is what you’ll need:
Settlement documents:
- Executed purchase contract
- Executed settlement sheet (HUD1, closing disclosure, etc.)
- Copy of deed
Short sale paperwork:
- Copy of short sale approval letter
- Copy of any executed lender short sale affidavits
- Copy of hardship letter explaining the reason/s for a short sale
Can a Bank Foreclose During the Short Sale?
This answer varies and is solely dependent on your given servicer, the investor on the loan, and how far into the short sale process you are.
In other words, this will be on a case-to-case basis.
Let’s say your house is listed as a short sale and there’s an upcoming foreclosure auction. If no offer is received before the scheduled date, the lender may choose not to postpone the auction.
In this case, the bank would still foreclose even if the home is listed for sale.
However, if an offer is received before the foreclosure auction date, your lender may postpone the auction. The bank will need time to review the submitted offer, so they won’t be foreclosing on their scheduled date.
Take note that when a lender “postpones” or “puts the foreclosure on hold” to review an offer for a short sale, it doesn’t mean you’re off the hook! It simply delays the foreclosure process.
The only way to avoid and stop the foreclosure is through a completed short sale.
Pros and Cons of a Short Sale
As a seller, short sales have many positives, along with some negatives. It is important to be aware and knowledgeable of both.
Below is a summary of the pros and cons of a short sale for the seller:
Benefits of a Short Sale
Avoid Foreclosure
When a short sale is completed, a foreclosure doesn’t go on the seller’s financial record or credit report. A short sale gives you a chance to work hard and obtain financing in the near future.
Take Back Your Freedom and Peace of Mind
Freeing yourself of your problem home will alleviate your mind from the worries/stress of the looming foreclosure, constant barrage of bills, creditor phone calls, etc.
Relocation Assistance
Relocation assistance is a compensation the lender offers a homeowner when they do a short sale and move out of the home.
In order to be eligible, the subject property must be listed as your primary residence. It is important to note that relocation assistance is offered on a case by case basis. The compensation from the lender is between $1,000-$3,000, on average.
No Deficiency Judgment
A deficiency judgement is the balance the lender is losing in the sale. A seller and their representatives should always ensure the verbiage on the short sale approval letter indicates that the lender is waiving their right to pursue the deficiency judgement from the borrower.
Bank Pays Real Estate Agent’s Commissions and Closing Costs
Unlike in a traditional transaction, the lender is responsible for the seller-side charges on the settlement sheet.
No Legal Fees to a Foreclosure Attorney
A short sale already means the seller is in a tough financial situation, so hiring an attorney for a foreclosure can be extra burdensome. With a short sale, you don’t have to do that.
In some states, a foreclosure attorney will charge you for showing up to court on numerous occasions, in addition to the hourly expenses for paperwork.
Lenders Prefer Short Sales to Foreclosures
Believe it or not, a short sale is beneficial to the lender. As long as you qualify, you’ll typically get their cooperation.
Lenders would rather avoid foreclosures because they drain time and financial resources. On top of that, banks do not want to accumulate real estate. They aren’t in the landlord business for a reason!
Short Sales Are Straightforward
Unlike the complexities of foreclosures, short sales are to the point. Once the seller completes and submits the requested paperwork and an offer is submitted, the bank orders an appraisal. Based on the appraisal results, the lender either counters or accepts the offer.
Negative Consequences of a Short Sale
Negative Impact on Credit
A short sale is better for your credit than a foreclosure. However, the fact of the matter is that it still has a negative impact.
Bank Has Final Say
A seller of a short sale home has much more control and involvement than they do during a foreclosure, which differs from a traditional sales process.
For example, the homeowner chooses the offer, executes it, and then submits to the bank. However, the seller and the lender must agree to the terms before the short sale can proceed. The final review and decision is still in the lender’s hands.
The Deficiency Balance Is Taxable
The seller and their representatives should always ensure the short sale approval letter waives the lender’s right to come after the deficiency balance (balance owed).
However, the borrower will have to fill out a 1099-C, which is the IRS tax form on the amount owed to the bank. So, if the mortgage balance is $100,000 and the home sold for $70,000, then $30,000 is taxable.
However, it’s important to note that the tax on the deficiency balance is also imposed after the Deed in Lieu and foreclosure itself . Sometimes, however, the tax is avoidable. Read my other article, How Does a Short Sale Affect Your Taxes? to learn more.
Short Sale vs Foreclosure
Now, we will discuss which of the two options might be better for you. For more information, read my article: Short Sale vs. Foreclosure vs. Deed in Lieu [Difference, Pros & Cons].
Credit Affects
Short Sale
A short sale negatively affects your credit score, although the lender won’t record it as a foreclosure. Short sales also allow you to avoid a much larger negative impact from a foreclosure item on your credit history.
A short sale has a negative impact on credit, but is not recorded as a foreclosure by the lender. Short sale prevents a much larger negative impact a foreclosure would have on the homeowner’s credit.
Foreclosure
One of the consequences of a foreclosure is the drop of your credit score for an average of 85-160 points. Foreclosure also stays on your credit for an average of 7 years.
Relocation Assistance
Short Sale
In some circumstances, if the home is listed as your primary residence, you may be eligible for relocation assistance. In these cases, the bank will write you a check to help with moving expenses. The amount varies, but averages between $1,000-$3,000.
Foreclosure
On the contrary, a foreclosure means you’re usually on your own. The lender simply takes the home back, without offering any financial assistance to the homeowner.
Save Yourself Money
Short Sale
When homeowners also work with a professional short sale processing company, the services are free. Foreclosure proceedings can be more expensive
The CFPB estimates that a homeowner might spend around $12,500 on average to complete a foreclosure.
Foreclosure
According to the U.S. Congress Joint Economic Committee, the average legal cost to a homeowner going through foreclosure is around $7,500.
Short Sale vs Deed in Lieu of Foreclosure
Availability as an Option
Short Sale
As long as the homeowner’s situation meets the criteria, they should be eligible for a short sale.
Deed in Lieu of Foreclosure
This option will be offered on a case by case basis, depending on the lender’s comfort level in the given situation.
Credit Affects
Short Sale
As noted earlier, short sales have a negative impact on credit, but typically lessening than foreclosures.
Deed in Lieu of Foreclosure
Negative impacts on credit are widely known to be similar to that of foreclosures.
When and Why Should I Short Sell My Home?
After weighing the various advantages and disadvantages of short selling, you’re left with two questions: Why and when should I short sell my house?
If you are a homeowner who resonated with at least one of the 8 benefits listed above, then short selling your home is worth it!
Most importantly, you will be alleviated of the stress that comes along with the home and the debt associated with it.
When you decide that a short sale is the right choice for you, the answer to “when” becomes very easy: ASAP!
The biggest mistake we see people make is to wait too long, after determining a short sale is their best option.
The longer a homeowner waits, the more interest accrues and the closer the foreclosure auction date becomes. As the foreclosure auction date gets closer, performing a short sale becomes more difficult.
If you are ready to take action, fill out the free short sale processing help form to have a reputable company in your location assess your situation and handle your short sale at no cost to you.
