What Is a Short Sale?
A short sale occurs when you sell your home for less than you owe on the mortgage, and your lender agrees to accept the reduced payoff. This is an alternative to foreclosure for homeowners who cannot afford to bring cash to closing to cover the shortfall. The lender must approve the sale price and terms before closing can proceed.
Short sales protect your credit more than foreclosure (though both have significant credit impacts) and may resolve the debt without the lender pursuing you for the deficiency, depending on the negotiated terms. However, the process is complex, time-consuming, and requires specialized experience from your agent and attorney.
The Short Sale Process
To initiate a short sale, you submit a hardship package to your lender documenting your financial situation — including income, expenses, assets, debts, and a hardship letter explaining why you cannot maintain the mortgage. Your agent lists the property and finds a buyer. The buyer's offer is submitted to the lender for approval.
Lender review can take 60 to 120 days or longer. During this period, the lender evaluates whether accepting the short sale makes more financial sense than proceeding to foreclosure. Multiple levels of approval may be required, especially if the loan has been securitized or there are multiple lien holders.
Tax and Credit Implications
The forgiven debt in a short sale may be considered taxable income by the IRS (cancellation of debt income). However, exceptions and exclusions may apply — including the insolvency exclusion and provisions under the Mortgage Forgiveness Debt Relief Act (when applicable). Consult a tax professional before proceeding.
Credit impact is significant but less severe than foreclosure. A short sale typically remains on your credit report for seven years and may reduce your score by 100 to 150 points. However, recovery begins immediately, and many former short sale sellers qualify for new mortgages within two to four years.