What is a Short Sale in Real Estate?

A short sale in real estate is a lender-approved sale where a homeowner sells a property for less than the total amount owed on the mortgage and approved selling costs. Short sales are most common when a homeowner owes more than the home is worth, is experiencing a financial hardship, or needs to sell but does not have enough equity to pay off the loan in full.

Because the lender is being asked to accept less than the full payoff, the lender must review and approve the sale before it can close. For many homeowners, a short sale may be a way to avoid foreclosure, reduce financial stress, and create a more controlled exit from the property. However, short sales can also involve credit, tax, legal, and deficiency issues, so it is important to understand the process before deciding what to do.

Short Sale Quick Facts

• Lender approval is required. The bank or loan servicer must agree to accept less than the full payoff.
• You do not always need to be in foreclosure. Some homeowners qualify before missing payments.
• The process is longer than a traditional sale. Many short sales take 60 to 120 days, depending on the lender and situation.
• The seller does not receive proceeds. The sale proceeds go to the lender and approved closing costs.
• Oftentimes, the seller receives Relocation Assistance. Relocation Assistance is paid at the close of escrow
• Tax, credit, and deficiency issues should be reviewed with professionals. Every situation is different.
• Homeowners should work with properly licensed professionals.  Avoid upfront-fee or short-sale scam offers.

Table of Contents

1. What Is a Short Sale?
2. Short Sale Example
3. What We See in Real Short Sale Transactions
4. How Does a Short Sale Work?
5. Who Qualifies for a Short Sale?
6. Do You Have to Be Behind on Payments?
7. What Is Required by the Lender?
8. The Short Sale Process: Step-by-Step
9. How Long Does a Short Sale Take?
10. Short Sale vs. Foreclosure vs. Loan Modification vs. Deed in Lieu
11. Pros and Cons of a Short Sale
12. What Happens to the Remaining Mortgage Balance?
13. Will a Short Sale Hurt Your Credit?
14. Can You Receive Relocation Assistance?
15. Are There Tax Consequences After a Short Sale?
16. California Short Sale Rules and Warnings
17. Buying a Short Sale Home
18. Common Short Sale Mistakes to Avoid
19. When to Talk to a Short Sale Expert
20. Frequently Asked Questions

What Is a Short Sale?

A short sale is a real estate sale where the homeowner sells the property for less than the amount needed to fully pay off the mortgage, liens, closing costs, commissions, escrow fees, title fees, and other approved sale expenses. In a normal sale, the sale proceeds are enough to pay off the mortgage and selling costs. The seller may then keep any remaining equity. In a short sale, the proceeds are not enough. The homeowner is “short” the amount needed to fully satisfy the loan and complete the sale. Because of that shortage, the lender, loan servicer, investor, and any other lien holders must agree to the sale.

The National Association of Realtors defines short sales as transactions in which the lender or lenders agree to accept less than the amount owed on the mortgage. A short sale is not the same as simply selling a home at a loss. If a homeowner sells at a loss without lender approval, the homeowner may still be responsible for bringing money to closing to pay off the full loan balance. In a short sale, the lender is asked to approve a reduced payoff so the home can be sold, even though the sale proceeds are not enough to cover all amounts owed.

Short Sale Example

Here is a simple example of how a short sale works:

In this example, the homeowner cannot sell the property through a normal sale unless they bring approximately $85,000 to closing. If they do not have the ability to do that, they may ask the lender to approve a short sale. If the lender approves the short sale, the home can be sold for market value, the sale proceeds are applied toward the loan, and the lender gives written approval for the transaction to close. The lender’s approval letter should explain how the remaining balance will be handled.

What We See in Real Short Sale Transactions

After helping California homeowners through short sale situations, the most common issues we see are second liens, unrealistic buyer timelines, incomplete lender packages, valuation disputes, relocation questions, and confusion about whether the lender will waive the remaining balance. This is why short sales require more than simply listing the home for sale. The agent or negotiator needs to understand lender requirements, hardship documentation, buyer timelines, valuation challenges, junior liens, and how to communicate with the loan servicer throughout the approval process. A successful short sale is usually the result of three things working together:

1. A realistic market value.
2. A complete short sale package.
3. A buyer who understands the lender approval process.

If you are unsure whether you may qualify, review our guide on how to qualify for a short sale.

How Does a Short Sale Work?

A short sale usually begins when a homeowner realizes they need to sell but does not have enough equity to complete a traditional sale. The homeowner may be behind on payments, facing foreclosure, going through divorce, dealing with job loss, experiencing medical issues, relocating, or simply unable to keep up with the property. In other cases, the homeowner may still be current on the mortgage but knows they cannot continue making payments or cannot afford to keep the home long term. The basic process looks like this:

1. The homeowner contacts a short sale professional.
2. The property value and mortgage payoff are reviewed.
3. The homeowner’s hardship and financial situation are evaluated.
4. The home is listed for sale at market value.
5. A buyer submits an offer.
6. The seller accepts the offer subject to lender approval.
7. The short sale package is submitted to the lender.
8. The lender reviews the seller, buyer, offer, hardship, and property value.
9. The lender may order a valuation such as a BPO or appraisal.
10. The lender approves, counters, denies, or requests more information.
11. If approved, the transaction moves forward to closing.

Unlike a traditional sale, the seller’s acceptance of the buyer’s offer is only one part of the process. The lender must also approve the sale before it can close. For a more detailed breakdown, read our full guide to the short sale process in real estate.

Who Qualifies for a Short Sale?

A homeowner may qualify for a short sale when they have a legitimate reason they need to sell and do not have enough equity to pay off the mortgage and selling costs. Common short sale hardship situations include:

• Loss of income
• Job relocation
• Divorce or separation
• Medical hardship
• Death of a borrower or household contributor
• Business failure
• Increased expenses
• Adjustable-rate mortgage payment increases
• Inability to keep up with property costs
• Negative equity
• Military relocation
• Financial hardship after a life event
• A property that cannot be rented for enough to cover the mortgage and expenses

Every lender has its own review process. Some lenders require detailed financial documentation. Others may have streamlined programs depending on the loan type, investor, and delinquency status. Loan type can also matter. If your mortgage is backed by a government program, review our guides to a VA loan short sale and an FHA loan short sale.

Do You Have to Be Behind on Payments?

No, you do not always have to be behind on mortgage payments to apply for a short sale. Many homeowners assume they must miss payments before a lender will consider a short sale. That is not always true. Some lenders may review a short sale request if the homeowner has a valid hardship and can show that they cannot afford to keep the home or must sell even though the property is worth less than the amount owed.

That said, every loan, lender, investor, and hardship situation is different. A homeowner who is current on payments may need to provide a stronger explanation of why the short sale is necessary. If you are current on your mortgage but worried that you may fall behind, it is better to explore your options early. Waiting until the foreclosure process has advanced can limit your options and create unnecessary pressure. If foreclosure is already a concern, you may also want to review ways to stop foreclosure immediately.

What Is Required by the Lender?

Most short sale lenders want to review the homeowner’s financial situation, the property value, the hardship, the buyer’s offer, and the expected net proceeds from the sale. A typical short sale package may include:

• Signed purchase agreement
• Listing agreement
• Buyer pre-approval or proof of funds
• Seller hardship letter
• Mortgage statement
• Financial worksheet
• Bank statements
• Pay stubs or proof of income
• Tax returns or tax documents
• Estimated settlement statement
• Authorization for the agent or negotiator to speak with the lender
• HOA information, if applicable
• Junior lien information, if applicable

The lender wants to confirm that the home is being sold for fair market value and that the short sale is a better financial outcome than foreclosure. Fannie Mae notes that a short sale offer should generally be as close to fair market value as possible and that the borrower may be required to make a financial contribution depending on the situation. You can review Fannie Mae’s borrower-facing short sale fact sheet for more background.

The Short Sale Process: Step-by-Step

1. Review the Homeowner’s Situation

The first step is to understand the homeowner’s goals, hardship, loan balance, property value, and timeline. This includes determining whether the homeowner is already in foreclosure, whether there are multiple liens, and whether there are any urgent deadlines.

2. Estimate the Property Value

A short sale must usually be supported by market value. The lender will want to know that the home is being exposed to the market and that the offer is reasonable based on comparable sales. A proper market analysis is important because pricing the property too high can prevent offers, while pricing it too low can cause the lender to reject the sale.

3. List the Property for Sale

The home is listed for sale and marketed to buyers. The listing should clearly explain that the sale is subject to lender approval so buyers understand that the timeline may be longer than a standard sale.

4. Accept an Offer Subject to Lender Approval

Once a buyer submits an offer, the seller can accept it subject to lender approval. This means the seller is willing to move forward, but the lender still has the final say.

5. Submit the Short Sale Package

After the offer is accepted, the complete short sale package is submitted to the lender. Missing documents are one of the most common causes of delay, so the package should be complete and organized.

6. Lender Review

The lender reviews the file, verifies the hardship, reviews the offer, evaluates the buyer’s ability to close, and orders a property valuation. If there are multiple lien holders, each lien holder may need to approve the sale.

7. Valuation and Negotiation

The lender may order a broker price opinion, appraisal, or other valuation. If the lender believes the offer is too low, they may counter the price or request additional information. This is where short sale experience becomes especially important. Valuation disputes, repair issues, junior liens, HOA balances, and buyer timelines often need to be negotiated.

8. Short Sale Approval Letter

If the lender approves the short sale, they issue a written short sale approval letter. This letter should be reviewed carefully because it explains the approved sale price, approved costs, closing deadline, and how the lender intends to handle the remaining balance.

9. Escrow and Closing

Once the short sale approval is received, the transaction moves toward closing. The buyer completes inspections, loan approval, and final closing steps. The sale closes through escrow, and the lender receives the approved net proceeds.

How Long Does a Short Sale Take?

Many short sales take approximately 60 to 120 days from offer submission to approval and closing, but the timeline can vary. A short sale may move faster if:

• There is only one loan.
• The seller’s documents are complete.
• The buyer is well qualified.
• The property value supports the offer.
• The lender has an efficient review process.
• There are no major repair, HOA, title, or lien issues.

A short sale may take longer if:

• There are multiple mortgages or liens.
• The lender requests repeated documentation updates.
• The buyer is impatient or not fully qualified.
• The lender’s valuation comes in higher than the offer.
• There are foreclosure deadlines.
• HOA, tax, judgment, or title issues need to be resolved.

Short sales are not always fast, but an organized file and experienced negotiation can make a major difference.

Short Sale vs. Foreclosure vs. Loan Modification vs. Deed in Lieu

Homeowners who are behind on payments or owe more than their home is worth may have several options. The right option depends on whether the homeowner wants to keep the home, sell the home, avoid foreclosure, or resolve the debt as cleanly as possible.

A short sale is often a better option than foreclosure when the homeowner needs to sell and the lender is willing to approve the transaction. However, it is not the only option. Homeowners should compare all available options before deciding. For a deeper comparison, read our guide to short sale vs. foreclosure.

Pros and Cons of a Short Sale

Potential Benefits of a Short Sale

A short sale may allow a homeowner to:

• Avoid a completed foreclosure.
• Sell the property even if they owe more than it is worth.
• Stay more involved in the sale process.
• Have more time to plan their move.
• Reduce uncertainty compared with waiting for foreclosure.
• Potentially receive relocation assistance, depending on the lender or program.
• Resolve an unaffordable property situation.
• Move forward after a financial hardship.
• Avoid having to bring the full shortage to closing if the lender approves the terms.

Potential Drawbacks of a Short Sale

A short sale may also involve:

• Lender approval delays.
• A longer sale timeline.
• Credit impact.
• Possible tax consequences if debt is canceled.
• Possible deficiency issues depending on the loan, lender, and state law.
• No guarantee of approval.
• More paperwork than a traditional sale.
• A buyer who may not want to wait.
• A lender valuation that may be higher than the buyer’s offer.

A short sale can be a very useful solution, but it needs to be handled carefully. You can also review our full article on the pros and cons of a short sale.

What Happens to the Remaining Mortgage Balance?

One of the most important questions in a short sale is what happens to the balance that is not paid off through the sale. The remaining balance may be:

• Forgiven by the lender.
• Waived as part of the short sale approval.
• Settled for a reduced amount.
• Handled through a contribution from the seller.
• Subject to a promissory note.
• Treated differently depending on the loan type, investor, and applicable law.

This is why the short sale approval letter is so important. The letter should be reviewed carefully before closing so the homeowner understands whether the lender is waiving the deficiency, reserving rights, requiring a contribution, or taking another position. California homeowners should also consider whether California anti-deficiency protections may apply to their situation. Because these issues can be legal in nature, homeowners should speak with a qualified California real estate attorney before making a final decision. For more background, review our article on foreclosure deficiency rights in California.

Will a Short Sale Hurt Your Credit?

A short sale can affect your credit. The exact impact depends on your payment history, whether you missed mortgage payments, how the lender reports the account, and your overall credit profile. In many cases, the missed payments leading up to the short sale may have a larger credit impact than the short sale itself. If the account is reported as settled for less than the full balance, that can also affect your credit. A short sale is often viewed as a better alternative than foreclosure, but it should not be described as credit-neutral. Homeowners should speak with their lender, a credit professional, or a housing counselor to better understand their situation. For more details, read our guide on what happens to credit after a short sale.

Can You Receive Relocation Assistance?

Some short sales may include relocation assistance. This is sometimes called a relocation incentive, transition assistance, or cash for keys. Relocation assistance is not guaranteed. It depends on the loan type, investor guidelines, lender policies, occupancy status, hardship, and short sale approval terms. If relocation assistance is available, it is usually paid through escrow at closing. The homeowner should not assume it will be approved unless it is clearly included in the written short sale approval. To learn more, review our guide to short sale relocation assistance.

Are There Tax Consequences After a Short Sale?

There can be tax consequences after a short sale if the lender cancels or forgives part of the mortgage debt. In some situations, canceled debt may be treated as taxable income. In other situations, an exclusion or exception may apply. The tax outcome depends on the loan, the property, the homeowner’s financial position, and current tax law. The IRS explains in Publication 4681 that canceled debts, foreclosures, repossessions, and abandonments can have federal tax consequences. The IRS also explains in Topic No. 431 that a creditor may send Form 1099-C when debt is canceled.

If you receive a Form 1099-C, do not ignore it. Speak with a qualified CPA or tax attorney to determine whether the canceled debt is taxable and whether any exclusions apply. For more information, read our article on taxes after a short sale or foreclosure. Important: San Diego Short Sale Experts is not a tax advisor and does not provide tax advice. We strongly recommend speaking with a qualified CPA or tax attorney before completing a short sale.

California Short Sale Rules and Warnings

California homeowners should be careful when choosing someone to help with a short sale. Short sale negotiations should generally be handled by a properly licensed real estate broker, a licensed salesperson working under a broker, or another legally permitted professional. Homeowners should be cautious of unlicensed short sale negotiators, upfront-fee scams, or anyone promising guaranteed lender approval. The California Department of Real Estate has issued consumer warnings about residential short sales, including warnings about questionable practices, fees, and the importance of understanding lender approval and possible debt forgiveness issues. You should also be cautious if someone:

• Guarantees that your lender will approve the short sale.
• Tells you to stop communicating with your lender without explanation.
• Asks you to deed the property to them.
• Pressures you to sign documents you do not understand.
• Charges questionable upfront fees.
• Claims there will be no credit, tax, or legal consequences.
• Promises relocation money before lender approval.
• Tells you not to speak with an attorney or CPA.

A short sale can be a legitimate foreclosure alternative, but it must be handled correctly. You can also review our article on short sale and foreclosure scams.

Buying a Short Sale Home

A short sale can also affect buyers. For buyers, a short sale may offer an opportunity to purchase a property at a fair market price, and sometimes below what a similar non-distressed property might sell for. However, buying a short sale is different from buying a traditional listing. Buyers should understand that:

• The seller’s acceptance is not final until the lender approves the sale.
• The lender may take weeks or months to respond.
• The property is often sold as-is.
• The lender may not agree to buyer repair requests.
• The lender may counter the price.
• The buyer must be patient and flexible.
• There may be foreclosure deadlines or lien issues.
• The short sale may not be approved.

A short sale can be a good opportunity for the right buyer, but it is not ideal for every buyer. Buyers with strict timelines, urgent move-in needs, or limited flexibility may be better served by a traditional sale.

Common Short Sale Mistakes to Avoid

Waiting Too Long

One of the biggest mistakes is waiting until the foreclosure process is too far along. The earlier you explore your options, the more time you have to prepare.

Hiring an Agent Without Short Sale Experience

Short sales require specific experience. A traditional listing agent may be excellent at selling homes but unfamiliar with lender negotiations, short sale packages, valuation disputes, and approval letters.

Submitting an Incomplete Package

Missing documents can delay the lender’s review and cause the file to be closed or restarted.

Overpricing the Home

The home still needs to be priced based on market value. If the property is overpriced, it may not attract a buyer. Without a buyer, the lender usually will not review the short sale.

Accepting the Wrong Buyer

The buyer needs to understand the short sale process and be willing to wait for lender approval. A buyer who is impatient, poorly qualified, or unrealistic can create problems later.

Ignoring Junior Liens

Second mortgages, HELOCs, HOA liens, tax liens, judgments, and other recorded interests can complicate a short sale. These should be identified early.

Assuming the Balance Will Automatically Be Forgiven

The remaining balance must be addressed in writing. Never assume the lender has waived the deficiency unless that is clearly stated in the approval terms.

Failing to Get Legal or Tax Advice

A short sale can involve tax, legal, credit, and deficiency issues. Homeowners should speak with qualified professionals before making a final decision.

When to Talk to a Short Sale Expert

You should consider speaking with a short sale specialist if:

• You owe more than your home is worth.
• You are behind on mortgage payments.
• You are worried you may fall behind soon.
• You received a notice from your lender.
• You are facing foreclosure.
• You need to relocate but cannot sell normally.
• You have a second mortgage or HELOC.
• You cannot afford to keep the property.
• You are unsure whether you qualify for a short sale.
• You want to compare short sale, foreclosure, loan modification, and deed-in-lieu options.

The earlier you ask questions, the more options you may have.

Talk With an Experienced California Short Sale Specialist

San Diego Short Sale Experts helps California homeowners understand their options when they owe more than their home is worth, are facing financial hardship, or are trying to avoid foreclosure. We can help you estimate your home’s value, review your loan balance, prepare a net sheet, explain the short sale process, and help you understand whether a short sale may be an option. There is no cost or obligation to have a confidential conversation with our team. You can also review our article on how much a short sale costs. Call San Diego Short Sale Experts at 619.777.6716 or contact us online to discuss your situation.

Frequently Asked Questions About Short Sales

What is a short sale in real estate?

A short sale is a lender-approved real estate sale where the home is sold for less than the total amount owed on the mortgage and approved selling costs. The lender must approve the sale because the proceeds will not fully pay off the loan.

Is a short sale the same as foreclosure?

No. A short sale is usually initiated by the homeowner and requires lender approval to sell the home. Foreclosure is a lender-driven legal process that can result in the lender taking back and selling the property after default. For more details, read our full comparison of short sale vs. foreclosure.

Do I have to be behind on payments to do a short sale?

Not always. Some lenders may consider a short sale if the homeowner has a valid hardship and does not have enough equity to sell normally, even if the homeowner is not yet behind on payments.

Who approves a short sale?

The mortgage lender, loan servicer, investor, and any junior lien holders may need to approve the short sale before it can close. If there is more than one mortgage or lien, multiple approvals may be required.

How long does a short sale take?

Many short sales take approximately 60 to 120 days, but the timeline depends on the lender, loan type, buyer, property value, documentation, number of liens, and foreclosure status.

What happens to the remaining balance after a short sale?

The remaining balance may be forgiven, waived, settled, or handled through another arrangement, depending on the lender, investor, loan type, approval terms, and applicable law. The approval letter should be reviewed carefully before closing.

Will a short sale hurt my credit?

A short sale can affect your credit. The impact depends on your payment history, how the lender reports the account, and whether you missed payments before the sale. A short sale is often considered less damaging than foreclosure, but it is not credit-neutral. Learn more about credit after a short sale.

Can I receive relocation assistance after a short sale?

Some homeowners may qualify for relocation assistance, but it is not guaranteed. If approved, the amount and terms should be included in the written short sale approval. Learn more about short sale relocation assistance.

Are there taxes after a short sale?

There may be tax consequences if the lender cancels or forgives debt. Homeowners may receive a Form 1099-C and should speak with a qualified CPA or tax attorney to determine whether the canceled debt is taxable or whether an exclusion may apply. You can also read our guide to taxes after a short sale.

Can I buy another home after a short sale?

Yes, many homeowners are able to buy again after a short sale, but the waiting period depends on the loan type, credit history, payment history, and lender guidelines at the time of application. Read more about buying a home after a short sale.

Is a short sale better than foreclosure?

In many situations, a short sale may be better than foreclosure because it gives the homeowner more control and may reduce some of the long-term consequences. However, the best option depends on the homeowner’s goals, loan type, hardship, timeline, and legal or tax situation.

Do I need a real estate attorney for a short sale?

A real estate attorney is not always required to list a short sale, but homeowners should consider speaking with an attorney if they have questions about deficiency liability, foreclosure, bankruptcy, title issues, tax liens, divorce, probate, or legal consequences.

How much does a short sale cost the seller?

In many short sales, the lender may approve payment of normal closing costs and commissions from the sale proceeds. However, this is not automatic. The lender may require a contribution, settlement, or other terms depending on the situation. Learn more about how much a short sale costs.

Can I short sale a home with two mortgages?

Yes, it may be possible to complete a short sale with two mortgages, but both lenders usually need to approve the sale. Second mortgages, HELOCs, HOA liens, and other junior liens can make the process more complex.

What should I do first if I am considering a short sale?

Start by reviewing your home’s estimated value, mortgage payoff, hardship, foreclosure status, and selling costs. Then speak with an experienced short sale professional, and consult a qualified CPA or attorney about tax, legal, and deficiency questions. You can contact San Diego Short Sale Experts for a confidential consultation.

Sources and Helpful References

• Consumer Financial Protection Bureau: What is a short sale?
• National Association of Realtors: Short Sales & Foreclosures
• Fannie Mae: What is a short sale?
• IRS Publication 4681: Canceled Debts, Foreclosures, Repossessions, and Abandonments
• IRS Topic No. 431: Canceled Debt
• California Department of Real Estate: Warning Regarding Residential Short Sales