What’s a Short Sale in Real Estate? This FAQ Sheet Breaks Down the Basics
We’ve broken out the most common questions about short sales to help you make a more informed decision about your next steps.
Every time you open your mailbox, you’ve got stacks of collection notices from every creditor. You’re behind on the mortgage with no way to catch up, and now you’re facing foreclosure. Soon, you’ll be out on the street with a big blot on your financial record.
In the midst of these financial straits, there may be a slightly better option: a short sale.
You’ll still have to sell the house and move out, but you’ll have more control over the situation and you’ll also put yourself in a better position to recover faster.
But what is a short sale, and is it the right route for you? We’ve broken out the most common questions about short sales to help you make a more informed decision about your next steps.
- What is a short sale?
- How do I know if I qualify for a short sale?
- Short sale vs. foreclosure: What’s the difference?
- What documents do I need to apply for a short sale?
- How is my home’s current value determined during a short sale?
- Who pays closing costs in a short sale?
- How does a short sale affect my credit score?
- What are the tax considerations of a short sale?
- Can I hire any agent to handle my short sale?
- What are the alternatives to a short sale?
- Is a short sale right for me?
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1. What is a short sale?
“A short sale is a scenario where the mortgage company approves a loan payoff that is short of — or less than — the full loan balance,” explains Misty Soldwisch, an experienced short sale agent in Des Moines, Iowa.
In a short sale, your mortgage lender agrees to let you sell your house for an amount that is less than what you owe and forgives any extra debt remaining after the house sells. This essentially means that they’re giving you money for free, at least on paper.
Note: This only works if your house is currently worth less than you owe on your mortgage.
2. How do I know if I qualify for a short sale?
You must be underwater on your mortgage in order to qualify for a short sale, which means that you have negative equity.
This can happen for a variety of reasons:
- A real estate market downturn lowered your home’s value below the amount you borrowed to purchase it
- The debt from a second mortgage or a home equity line of credit (HELOC), combined with your primary loan, now totals more than the house is worth
- Missed mortgage payments, delinquency fees, interest charges that added up
Negative equity isn’t the only criteria you need to meet in order to qualify for a short sale, though.
“In order for a mortgage company to consider a short sale, the property needs to be in imminent risk of foreclosure. Lenders will not consider a short sale if there is no foreclosure pending,” says Soldwisch.
“The borrowers must also be able to demonstrate a distressed financial situation. The mortgage company will look for hardship factors like divorce, the loss of a job — which is a loss of income — or devaluation of the home, meaning that the house is currently worth less than the borrowers paid for it, putting them underwater on the property.”
Bottom line: If you’re underwater on your mortgage, if you’ve received pending foreclosure notices, and you can demonstrate financial distress, you may qualify for a short sale — as long as your lender agrees.
3. Short sale vs. foreclosure: What’s the difference?
Short sales and foreclosures are often lumped together because both are rock-bottom options for homeowners who are behind on their mortgage payments and in financial hot water.
They aren’t the same, though.
When you’ve reached the foreclosure stage, the bank has taken the house from you because you’ve defaulted on your mortgage. In that scenario, your lender cuts their losses and will move to evict you. When your house eventually sells, the bank is the one selling it — you are no longer involved.
However, letting your lender foreclose on your house doesn’t necessarily mean you’re freed from your mortgage debt. Depending on where you live, your lender can sue you to recoup some of what you owe.
None of this happens with a short sale. When you arrange for a short sale, your lender is agreeing to forgive any extra debt after the house is sold for less than you owe. With a short sale, you’re also the one in the driver’s seat during the sale of the house.
“With a short sale, negotiations are between the homeowner and the purchaser, not the mortgage company,” explains Soldwisch.
“The terms are subject to approval by the mortgage company, but the seller is still very much in control of determining the price, the terms, the closing date, and so on.”
Here’s a side-by-side comparison to help you quickly understand the key differences between a short sale and foreclosure:
| Feature | Short Sale | Foreclosure |
| Definition | Sale of a home for less than the remaining mortgage balance, with lender approval | Legal process where the lender seizes the property after missed payments |
| Initiated by | Homeowner (with lender cooperation) | Lender |
| Control of Sale | Seller maintains some control (e.g., chooses the listing agent, negotiates offers) | Homeowner loses control; the lender takes over |
| Credit Impact | Typically lowers score by 50–150 points; less severe than foreclosure | Can drop score by 150–300 points; stays on credit report for up to 7 years |
| Timeline | Can take several months depending on lender response | Often faster once the lender begins legal action |
| Eligibility for New Mortgage | May qualify for a new mortgage in 2–4 years | May need to wait 7 years to qualify for conventional financing |
| Deficiency Judgments | Possible, but may be waived in negotiation | Possible; lender may pursue borrower for remaining balance |
| Stigma/Long-Term Effects | Less damaging in the eyes of future lenders | Considered more severe by lenders and credit agencies |
Bottom line: A short sale is usually a more borrower-friendly option that gives homeowners a chance to minimize damage and move on with more dignity and credit intact.
