If you’re wondering, “What is a short sale?”, it happens when a homeowner sells a property for less than what they owe on the mortgage. Put simply, the house sells “short” of the mortgage balance.
A short sale can sometimes help a homeowner avoid foreclosure, but it usually requires lender or mortgage servicer approval, extra paperwork, longer timelines, and patience. Here’s how short sales work and what buyers and sellers should understand before moving forward.
What Is a Short Sale?
A short sale is a real estate transaction where a home is sold for less than the remaining mortgage balance, and the lender or mortgage servicer approves the sale.
For example, if you owe $300,000 on a mortgage but your house is worth $250,000, selling the home at market value won’t fully pay off the loan. If the lender agrees to the short sale, it allows the home to sell even though the proceeds are less than the mortgage balance.
Before agreeing to a short sale, sellers should ask whether the remaining balance will be waived. Depending on state law and the written short sale agreement, the homeowner may still be responsible for a deficiency balance unless the lender agrees otherwise. The IRS also has guidance on possible tax implications when debt is canceled or forgiven.
Short Sale vs. Foreclosure
A short sale and foreclosure can both happen when a homeowner is struggling with mortgage debt, but they’re not the same thing.
| Short sale | Foreclosure |
| The homeowner participates in selling the property. | The lender uses a legal process after mortgage default. |
| The lender or mortgage servicer must approve the sale. | The lender controls the foreclosure process. |
| The home sells for less than the mortgage balance. | The property may be taken back and sold by the lender. |
| It may help the homeowner avoid foreclosure, but the homeowner still has to move. | It can lead to the homeowner losing the property through a legal process. |
Can a Short Sale Happen While Foreclosure Is in Progress?
It depends. A lender or mortgage servicer may consider a short sale even after foreclosure proceedings have started, but timing matters.
Deadlines are much tighter once foreclosure is underway, and pursuing a short sale doesn’t always mean the foreclosure process will stop. Homeowners in this situation should contact their mortgage servicer as early as possible and consider speaking with a HUD-approved housing counselor.
How Does a Short Sale Work?
A short sale usually involves the seller, buyer, lender or mortgage servicer, and real estate agents. Here’s how the process often works:
- The seller contacts the mortgage servicer: The homeowner asks about short sale requirements and may need to submit a loss mitigation application, hardship documentation, financial records, and other supporting paperwork.
- The seller lists the home: The homeowner works with a real estate agent to list the property.
- The buyer makes an offer: A buyer makes an offer on the house. The seller may accept it conditionally, meaning the lender or mortgage servicer still has to approve the deal.
- The lender reviews the sale: The lender or servicer reviews the offer price, the home’s estimated market value, the seller’s hardship documentation, lienholder issues, and the lender’s expected financial loss. Approval isn’t guaranteed.
- The deal closes: If the short sale is approved, the transaction closes and the buyer takes ownership of the home.
How Long Does a Short Sale Take?
“Short sale” is misleading because the process isn’t necessarily short or quick. The word “short” means the sale price falls short of the mortgage balance. It doesn’t mean the process is faster.
A short sale may take a few weeks, but it can also take several months. These factors can affect the timeline:
- Missing paperwork
- Negotiations over the offer price or closing costs
- Appraisals or property valuations
- Multiple mortgages, liens, or lienholders
- Lender or mortgage servicer review times
If you’re a buyer considering a short sale, be prepared to wait and avoid assuming the deal is final until the lender approves it in writing.
Common Questions About Costs, Risks, and Seller Proceeds
Who Pays Closing Costs in a Short Sale?
Closing costs are usually negotiated as part of the short sale. The lender or mortgage servicer typically reviews and approves these costs before agreeing to the sale.
Does the Seller Get Any Money in a Short Sale?
Usually, the seller doesn’t receive profit from a short sale because the home is selling for less than the mortgage balance. The sale proceeds generally go toward the mortgage debt.
The more important question is whether the remaining balance will be forgiven. Sellers should ask for the short sale terms in writing, including whether the lender will waive any deficiency balance.
What Is the Downside of a Short Sale?
Short sales can help in some situations, but they also come with drawbacks, including:
- Long timelines
- Uncertainty because the lender could reject the offer
- Extra paperwork for the seller
- Less control for both the buyer and seller
- Possible repair issues with the property
- Potential deficiency-balance or tax questions for the seller
A short sale may help a homeowner avoid foreclosure, but it doesn’t erase every risk automatically. Buyers may also see an opportunity, but they should be prepared for delays, lender review, and the possibility that the sale won’t be approved.
Short Sale, Long Process
Short sales are slower and less predictable than traditional home sales. The lender or mortgage servicer has a major say in whether the transaction can move forward, so a short sale isn’t a fit for every situation.
Whether you’re a homeowner under financial stress or a buyer considering a short sale property, understanding the approval process, timeline, costs, and possible deficiency issues can help you ask better questions before you move forward.
