What Is a Short Sale? A Simple Guide for Homeowners
Learn what a short sale is, how it works, and whether it might be right for you if you're behind on your mortgage. A plain-English guide.
You Have More Options Than You Think
If you’re behind on your mortgage, you may feel stuck. But you have choices — and a short sale is one of them. This guide explains what a short sale is, how it works step by step, and how to decide if it’s right for you.
What Is a Short Sale?
A short sale happens when you sell your home for less than what you owe on your mortgage. Your lender agrees to accept the lower amount and release you from the remaining balance.
Here’s a simple example. Say you owe $250,000 on your mortgage, but your home is only worth $200,000 right now. In a short sale, you would sell the home for $200,000. Your lender agrees to take that amount instead of the full $250,000.
The word “short” means the sale price falls short of what you owe. It has nothing to do with how fast the sale happens — in fact, short sales often take longer than regular home sales.
Why Would a Lender Agree to This?
This is the question most people ask first. Why would a bank accept less money?
The answer is simple: foreclosure is expensive for lenders too. When a bank forecloses on a home, it has to pay for legal fees, property maintenance, insurance, and real estate commissions. The home may sit empty for months. By the time the bank sells it, the total cost can be much higher than the loss from a short sale.
A short sale lets the lender recover most of the money faster and with less hassle. That’s why many lenders prefer it over foreclosure.
How Does a Short Sale Work?
A short sale has several steps. Here’s what to expect:
1. Talk to Your Lender
Call your mortgage company and ask about loss mitigation options. Tell them you’re having trouble making payments and want to explore a short sale. They will likely ask you to fill out a hardship application.
2. Prove Your Hardship
Your lender needs to understand why you can’t keep up with payments. Common reasons include:
- Job loss or reduced income
- Medical bills or illness
- Divorce or separation
- Military relocation
- Interest rate adjustment you can’t afford
You’ll need to provide documents like pay stubs, bank statements, tax returns, and a hardship letter explaining your situation in your own words.
3. Find a Real Estate Agent
Not just any agent — you want someone who has experience with short sales. These transactions are more complex than regular home sales. A certified advisor who specializes in loss mitigation can guide you through the process and negotiate with your lender on your behalf.
You can search for CALM-certified advisors in your area through our directory.
4. List Your Home
Your agent will help you set a fair market price and list your home for sale. When a buyer makes an offer, your agent sends it to your lender for approval.
5. Wait for Lender Approval
This is often the longest part. Your lender reviews the offer, the property value, and your financial situation. They may accept, reject, or counter the offer. This can take anywhere from a few weeks to several months.
6. Close the Sale
Once your lender approves the offer, the sale moves forward like a normal closing. You sign the paperwork, the buyer gets the home, and your lender receives the sale proceeds.
What Happens to the Remaining Balance?
This is an important question. Remember the $50,000 gap in our example? That remaining balance is called the deficiency.
What happens to it depends on:
- Your state’s laws. Some states don’t allow lenders to come after you for the deficiency. Others do.
- Your lender’s policy. Many lenders agree to forgive the remaining balance as part of the short sale approval. Make sure this is in writing before you close.
- Tax rules. In some cases, forgiven debt can be counted as income by the IRS. Talk to a tax professional about your specific situation.
Getting the deficiency waived in writing is one of the most important parts of a short sale negotiation. A good agent will make sure this is handled.
Short Sale vs. Foreclosure: What’s the Difference?
| Short Sale | Foreclosure | |
|---|---|---|
| Who controls the sale? | You do, with your agent | The bank does |
| Credit impact | Typically 80-120 point drop | Typically 150-250 point drop |
| How long on credit report? | Usually reported as “settled” | Stays on report for 7 years |
| Time to buy again | Often 2-4 years | Usually 5-7 years |
| Your involvement | You participate in the process | The bank handles everything |
| Emotional impact | You have some control | You have very little control |
A short sale isn’t painless. Your credit will take a hit, and the process can be stressful. But for most people, it’s a better outcome than foreclosure.
Is a Short Sale Right for You?
A short sale might be a good fit if:
- You owe more than your home is worth
- You can no longer afford your monthly payments
- You’ve explored other options like loan modification and they didn’t work
- You want to avoid foreclosure on your credit report
- Your lender is willing to consider it
A short sale probably isn’t the right choice if:
- You can still make your payments (a loan modification might be better)
- You have enough equity to sell your home the regular way
- You’ve already received a foreclosure sale date that’s very soon
What Should You Do Next?
If you think a short sale might be right for you, here are your next steps:
- Call your lender. Ask about your options. The sooner you call, the more choices you’ll have.
- Talk to a HUD-approved housing counselor. They offer free advice and can help you understand all your options. Call 1-800-569-4287 to find one near you.
- Find a certified advisor. A real estate agent with specialized training in loss mitigation can make the process much smoother. Search our directory to find a CALM-certified advisor in your state.
You’re Not Alone
Millions of homeowners have gone through this process. Falling behind on your mortgage doesn’t mean you’ve failed — it means life threw you a curveball. The important thing is that you’re looking into your options now.
A short sale can help you move forward with less damage to your credit, less stress, and more control over what happens next. The right advisor can walk you through every step.