When a Short Sale Makes Sense
A short sale is appropriate when you owe more than your property is worth and cannot afford to continue making payments. This negative equity situation — sometimes called being underwater — means a traditional sale would require you to bring cash to closing to pay off the mortgage. A short sale avoids this by getting the lender to accept less than what is owed.
Short sales make the most sense when foreclosure is the alternative. While both damage your credit, a short sale typically results in a 50 to 80 point reduction compared to 100 or more points for a foreclosure, and the recovery period is shorter. A short sale also allows you to remain in control of the process rather than having the court and lender dictate the timeline.
The Short Sale Process
The process begins with listing the property with an agent experienced in short sales. Your agent will help you determine fair market value and submit a short sale package to your lender, which includes a hardship letter, financial documentation, a listing agreement, and a comparative market analysis.
Once you receive an offer from a buyer, your agent submits it to the lender for approval. The lender evaluates whether accepting the offer makes financial sense compared to the cost of foreclosure. This evaluation typically takes 60 to 120 days, though timelines vary by lender. If approved, the sale proceeds like a normal closing, with the lender accepting the reduced amount.
Tax and Legal Implications
When a lender forgives debt through a short sale, the forgiven amount may be considered taxable income by the IRS. The lender will typically issue a 1099-C for the forgiven debt. However, federal provisions for mortgage forgiveness and state-level exemptions may protect you — consult a tax professional for your specific situation.
In New York, lenders who approve short sales generally agree to waive any deficiency — meaning they will not pursue you for the remaining balance after the sale. Get this in writing as part of the short sale approval. Your attorney should review all lender communications to ensure the deficiency waiver is clear and enforceable.