# What Is a Short Sale on a House? Process, Alternatives, and Mistakes to Avoid

![Short Sale](https://www.investopedia.com/thmb/TQEVacEzXWICcYUfi5HwIAWE4Os=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/real-estate-short-sale_sourcefile-5029c549f7c249ebb831e3f0e61fcab2.jpg)

*— Investopedia / NoNo Flores*

## What Is a Short Sale?

A short sale in real estate is an offer of a property at an asking price that is less than the amount due on the current owner's mortgage.

A short sale is usually a sign of a financially distressed homeowner who needs to sell the property before the lender seizes it in [foreclosure](https://www.investopedia.com/terms/f/foreclosure-action.asp).

All of the proceeds of a short sale go to the lender. The lender then has two options—to forgive the remaining balance or to pursue a [deficiency judgment](https://www.investopedia.com/terms/d/deficiency-judgment.asp) that requires the former homeowner to pay the lender all or part of the difference. In some states, this difference in price must be forgiven.

### Key Takeaways

*   A short sale usually indicates a homeowner in financial distress, a real estate market in the doldrums, or both.
*   The short sale must be approved in advance by the mortgage lender.
*   The mortgage holder may be required to pay the shortfall, or the debt may be forgiven.
*   The financial consequences of a short sale may be less severe than a foreclosure for both the seller and the lender.
*   For a home buyer, a short sale can be a good opportunity if approached cautiously.

![Short Sale](https://www.investopedia.com/thmb/TQEVacEzXWICcYUfi5HwIAWE4Os=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/real-estate-short-sale_sourcefile-5029c549f7c249ebb831e3f0e61fcab2.jpg)

*— Investopedia / NoNo Flores*

## Understanding a Short Sale

[Short sales usually occur](https://www.investopedia.com/ask/answers/09/short-selling-real-estate.asp) when a homeowner is in [financial distress](https://www.investopedia.com/terms/d/distressale.asp) and has missed one or more mortgage payments. Foreclosure proceedings may be looming ahead.

They also are more likely to occur when the housing market is in a down period, such as the [2007-2009 financial crisis](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp#:~:text=The%202007%2D2009%20financial%20crisis,worthless%20investments%20in%20subprime%20mortgages.), which caused home prices to plummet and sales to slow in many regions.

For example, if real estate values drop, a homeowner may end up selling a house for $150,000 when there is still $175,000 remaining to be paid on the mortgage. The difference of $25,000 (less any [closing](https://www.investopedia.com/terms/c/closingcosts.asp) and other [selling costs](https://www.investopedia.com/terms/t/transactioncosts.asp)) is called the deficiency balance.

### Lender Sign-Off

Before the process can begin, the mortgage lender must sign off on a decision to execute a short sale, sometimes termed a [pre-foreclosure](https://www.investopedia.com/terms/p/pre-foreclosure.asp) sale.

The mortgage lender, typically a bank or credit union, requires that the mortgage holder submit documentation explaining why a short sale makes sense. No short sale can occur without the lender's prior approval.

Short sales tend to be lengthy and paperwork-intensive transactions, taking up to four months to process. They are not as detrimental to a homeowner’s [credit rating](https://www.investopedia.com/terms/c/creditrating.asp) as a [foreclosure](https://www.investopedia.com/terms/f/foreclosure.asp).

> **Warning**
>
> Discrimination in mortgage lending is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One is to file a report to the Consumer Financial Protection Bureau (CFPB) or with the U.S. Department of Housing and Urban Development (HUD).

## Special Considerations

A short sale hurts a person’s [credit score](https://www.investopedia.com/terms/c/credit_score.asp) less than a foreclosure, but it is still a negative credit mark. Any type of property sale that is denoted by a credit company as not paid as agreed is a ding on the score. Short sales, foreclosures, and [deeds-in-lieu of foreclosure](https://www.investopedia.com/terms/d/deed_in_lieu_of_foreclosure.asp) all hurt an individual's credit rating to some degree.

Short sales don’t always negate the remaining mortgage debt. There are two parts to a mortgage. The first is the [lien](https://www.investopedia.com/terms/l/lien.asp) against the property that is used to secure the loan. The lien protects the lender in case a borrower can’t repay the loan. It gives the lending institution the right to sell the property for repayment. This part of the mortgage is waived in a short sale.

The second part of the mortgage is the promise to repay. Lenders can still enforce this portion either through a new note or by collecting the deficiency. In any case, the lender must approve the short sale, which means borrowers are sometimes at their whim.

> **Fast Fact**
>
> When convincing a lender to agree to a short sale, the homeowner must be able to cite a new source of financial difficulty, not something that was withheld at the time the mortgage was approved.

## Short Sale vs. Foreclosure

A short sale or foreclosure are two possible outcomes for homeowners who are behind on their mortgage payments, own a home that is [underwater](https://www.investopedia.com/terms/u/underwater-mortgage.asp), or both. In either case, the owner is forced to part with the home, but the timeline and consequences are different.

### How a Foreclosure Works

In a foreclosure, the lender seizes the home after the borrower fails to make payments. Unlike a short sale, a foreclosure is initiated by the lender alone. Foreclosure is the last option for the lender.

In such cases, the lender repossesses the home, hoping to eventually make good on its investment in the mortgage. Unlike in most short sales, many foreclosures take place after the homeowner abandons the home. If the occupants are still in the home, they are evicted by the lender.

Once the lender has access to the home, it orders an [appraisal](https://www.investopedia.com/terms/a/appraisal.asp) and puts it up for sale.

Foreclosures normally take less time to complete because the lender wants to [liquidate](https://www.investopedia.com/terms/l/liquidate.asp) the asset quickly. Foreclosed homes may even be auctioned off at a public trustee sale.

Depending on the circumstances, homeowners who experience foreclosure have to wait for two to seven years to purchase another home. A foreclosure is kept on a person’s [credit report](https://www.investopedia.com/terms/c/creditreport.asp) for seven years.

### How a Short Sale Works

A distressed homeowner generally gets to stay in the home during the short sale process.  

A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home immediately.  

While a foreclosure essentially lets you walk away from your home—albeit with grave consequences for your financial future, such as having to declare bankruptcy and destroying your credit—completing a short sale is labor-intensive. However, the payoff for the extra work involved in a short sale may be worth it.

> **Important**
>
> Less drastic alternatives to a short sale include loan modification or the use of private mortgage insurance.

## Short Sale Alternatives

Before resigning yourself to a short sale, talk to your lender about the possibility of a revised payment plan or [loan modification](https://www.investopedia.com/terms/l/loan_modification.asp). One of these options might allow you to stay in your home and get back on your feet.

Obtaining a loan modification may temporarily lower your credit score, as will any application for new credit.

Another possible option for staying in your home may be available if you have [private mortgage insurance](https://www.investopedia.com/mortgage/insurance/) (PMI). Many homeowners who purchased homes with less than 20% down were required to purchase PMI with their homes. If the PMI company thinks you have a chance to recover from your current financial situation, it may advance funds to your lender to bring your payments up to date. Eventually, you’ll have to repay the advance.

## The Short Sale Process

Several steps are necessary to complete a short sale.

### Convince the Lender

Before beginning the process, struggling homeowners should consider how likely it is that the lender will agree to work with them on a short sale. The lender is not required to cooperate.

The source of the financial trouble should be new, such as a health problem, the loss of a job, or a divorce, rather than something that was not disclosed when the homebuyer originally applied for the loan. The lender won’t be sympathetic to a dishonest borrower.

However, if you feel you were a victim of [predatory lending](https://www.investopedia.com/terms/p/predatory_lending.asp) practices, you may be able to talk the lender into a short sale even if you have not had any major financial catastrophes since purchasing the home.

Be aware of other circumstances that may prevent the approval of a short sale. If you are not in [default](https://www.investopedia.com/terms/d/default2.asp) on your mortgage payments, the lender may not approve a short sale. Also, the lender may not approve a short sale if they determine they can get more money from foreclosing on your home versus a short sale. If someone [cosigned](https://www.investopedia.com/terms/c/co_sign.asp) the mortgage, the lender will hold your cosigner responsible for payment before considering a short sale.

If you believe a short sale is your only option, call your lender or bank and speak with a decision-maker, not merely a [customer service](https://www.investopedia.com/terms/c/customer-service.asp) representative. Speak with your mortgage loan officer and the lender’s [loss mitigation](https://www.investopedia.com/loss-mitigation-8683159) department. If the lender is willing to consider a short sale, you can move forward with creating the short-sale proposal and finding a buyer.

### Consult Professionals

You may want to consult with an attorney, a tax professional, and a [real estate agent](https://www.investopedia.com/terms/r/realestateagent.asp). While these are high-priced professional services, if you try to handle a complex short-sale [transaction](https://www.investopedia.com/terms/t/transaction.asp) yourself, you may find yourself in even bigger financial trouble.

You may be able to pay for these service fees out of the sale proceeds from your home. Professionals accustomed to dealing with short-sale transactions will be able to give you guidance on how to pay them.

> **Fast Fact**
>
> New rules for the National Association of Realtors, expected to take effect in July2024, may lower commissions for home buyers and sellers. If a federal courtapproves the changes, the standard 6% commission ends and sellers no longerhave to propose compensation to prospective buyers and their agents. NAR willalso require brokers to enter into written agreements with their buyers to helpconsumers understand what services will be provided, and at what cost.

### Set a Price

When setting an asking price, make sure to factor the cost of selling the [property](https://www.investopedia.com/terms/p/property.asp) into the total amount of money you need from the sale. Of course, you want to sell the home for as close to the value of your mortgage as possible, but in a down market, there can be a [shortfall](https://www.investopedia.com/terms/s/shortfall.asp).

In some states, even after a short sale, the bank will expect you to pay back all or part of that shortfall.

### Gather Your Documents and Find a Buyer

Gather all the documents you’ll need to [prove your financial hardship](https://www.investopedia.com/how-to-write-a-hardship-letter-for-a-mortgage-8652454) to the lender. These may include [bank statements](https://www.investopedia.com/terms/b/bank-statement.asp), medical bills, pay stubs, a termination notice from your former job, or a divorce decree.

It is up to you to come up with a proposal. Be aware that the lender ultimately must approve a short sale after receiving all the details because the lender is the recipient of the proceeds. Since it's your responsibility to find a buyer, contact a real estate agent to help you find someone to buy your home.

### Submit Your Proposal to the Bank

Once you have a buyer and the necessary paperwork, you are ready to submit the buyer’s offer and your proposal to the bank.

Along with the documentation of your distressed financial status, your proposal should include a hardship letter explaining the circumstances preventing you from making your [mortgage payments](https://www.investopedia.com/mortgage/mortgage-rates/payment-structure/). You want to convince them of your financial situation while also appealing to the bank.

Be careful about submitting your financial information to a lender. If it does not approve the short sale, it may use your financial information to try to get money out of you in foreclosure proceedings. If you still have cash [assets](https://www.investopedia.com/terms/a/asset.asp), you may be expected to use them to continue making mortgage payments or to make up the shortfall between the sale price and the mortgage amount.

An attorney experienced in completing short sales can help you navigate the details.

Short sales can take longer than regular home sales due to the need for lender approval and can fall through. The buyer may find another property while you're waiting on an answer from the lender. If the short-sale transaction goes through, consult with the Internal Revenue Service (IRS) to see if you will have to pay taxes on the shortfall.

Don't forget that a short sale can still affect your credit score. The months of mortgage payments that you missed before the short sale can show up as delinquent payments on your [credit report](https://www.investopedia.com/terms/c/creditreport.asp). It is up to the bank to decide what to report, so it’s in your best interest to try to convince the bank not to report your defaulted payments.

Your bank may be more likely to be generous in this regard if you brought up your hardship before you were significantly behind.

> **Tip**
>
> If your property value is less than the mortgage loan, you may need to pay the difference or deficiency. Contact your lender to determine if they'll offer you a waiver of deficiency, meaning they will not collect the difference owed. If approved, be sure to get the deficiency waiver in writing.

## Short Sale Strategies for Buyers and Investors

Short sales can provide excellent opportunities for buyers to get houses at a reduced price. Here are a couple of tips to help you make smart decisions when considering a short-sale property.

### Learn How to Find Them

Most short-sale properties are listed by real estate agents and on real estate websites. Some listings may not be advertised as short sales, so you might have to look for clues within the listing. It may be indicated as subject to bank approval.

An experienced real estate agent can make a big difference in terms of finding and closing short-sale properties. Agents who specialize in short sales may hold a Short Sales and Foreclosure Resource (SFR) certification, a designation offered by the [National Association of Realtors](https://www.investopedia.com/terms/n/national-association-of-realtors.asp) (NAR).

Holders of this certification have specialized training in short sales and foreclosures, qualifying sellers for short sales, [negotiating](https://www.investopedia.com/terms/n/negotiation.asp) with lenders, and protecting buyers.

### Prepare to Hurry Up and Wait

Short sales are complicated, time-consuming transactions for both the buyer and the seller. It can take weeks or months for a lender to approve a short sale, and many buyers who submit an offer end up canceling because the process takes too long.

Rules for short-sale transactions vary from state to state, but the steps normally include:

*   **Short sale package:** The borrower has to prove financial hardship by submitting a financial package to their lender. The package includes financial statements, a letter describing the seller’s hardship(s), and financial records, including tax returns, [W-2s](https://www.investopedia.com/terms/w/w2form.asp), payroll stubs, and bank statements.
*   **Short sale offer:** Once a seller accepts an offer from a potential buyer, the listing agent sends the lender the [listing agreement](https://www.investopedia.com/terms/l/listing-agreement.asp), an executed purchase offer, the buyer’s [pre-approval](https://www.investopedia.com/terms/p/preapproval.asp) letter, a copy of the [earnest money](https://www.investopedia.com/terms/e/earnest-money.asp) check, and the seller’s short-sale package. If the package is missing anything, either because a document wasn’t submitted or due to a filing error on the bank’s part, the process will be delayed.
*   **Bank processing:** The bank’s review of the offer can take several weeks to months. In the end, it will approve or deny it. Just because the seller accepts an offer doesn’t mean the bank will agree to the price. If the bank thinks it can make more money through foreclosure proceedings, it will reject the offer.

> **Tip**
>
> If you are buying a house in a short sale with the intention of flipping it, the key to a profitable transaction is a good purchase price.

## Advantages and Disadvantages of a Short Sale

Short sales allow a homeowner to dispose of a property that is losing value. Although they do not recoup the costs of their mortgage, a short sale allows a buyer to escape foreclosure, which can be much more damaging to their credit score. In some cases, the lender may write the remaining debt as a loss, thereby reducing the owner's debt burden.

A short sale also allows homeowners to reduce the fees they pay when they sell their homes. In most cases, these fees are the obligation of a property owner when they sell the property. In a short sale, these fees are paid by the lender.

For buyers, the benefits of a short sale are evident: they get a discount price on a home from a lender that's motivated to sell the property. On the other hand, the buyer has to do a lot more homework. Short sales typically don't come with the same disclosures as a regular sale, and it is up to the prospective buyer to identify any problems with a property.

### Pros and Cons of a Short Sale

Pros

*   Allows homeowners to dispose of a debt that they are unlikely to repay.
    
*   Homeowners have to pay fewer fees than a typical home sale.
    
*   Short sales allow buyers to buy property at a discount
    
*   Lenders may write off part of the debt as a loss.
    

Cons

*   Short sales come with fewer legal disclosures than a typical home sale.
    
*   There is more paperwork involved in a short sale.
    
*   Short sales can damage the seller's credit rating, but less than a foreclosure.
    

## Mistakes to Avoid

Homes in a short sale are sold as-is, without the mandatory seller obligations of a normal real estate sale. Since short sales do not come with the typical disclosures of a normal house sale, it falls on the prospective buyer to inspect the property and identify any faults. Short-sold homes may be in worse conditions than the average home on the market, making it all the more important to identify any problems.

It is also possible that a prospective buyer may not give themselves enough time before closing. As mentioned, short sales tend to require more work than an average house sale, meaning that they may also take longer to close. Buyers should be careful to make sure they have time to complete the process before the sale closes.

## It’s All in the Numbers

In [real estate investing](https://www.investopedia.com/mortgage/real-estate-investing-guide/), it is said that the money is made in the buy. This means that a good purchase price is often the key to a successful deal. If you can get a property for a good price, you increase the odds of coming out ahead when it comes time to sell. If the purchase price is on the high end, on the other hand, you’ll watch your profit margin erode.

You should be able to buy the property, put it in great condition, and sell it at a profitable price. Investors need to be able to turn around and sell the house quickly—typically at below-market—and a good purchase price makes this possible.

However, the purchase price is only one important number. You’ll have to make some other calculations as well, including:

### Repairs and Renovation Costs

These costs will vary depending on the property’s condition and your plans for it. It pays to put in the time and effort to develop a realistic budget, as this is one of the figures you’ll need to determine if the investment can make money.

Costs to consider include material, labor, permits, inspection fees, trash removal, storage costs, and dumpster rentals. A good inspection (before making the purchase) can alert you to any large expenses, such as a cracked foundation, faulty wiring, or extensive termite damage.

### After Repair Value (ARV)

ARV is an estimate of the property’s fair market value (FMV) after any repairs and renovations are made. Investors look at this number to determine whether a property has profit potential.

The best way to evaluate a property’s ARV is to look at [comparables](https://www.investopedia.com/terms/c/comparables.asp) (comps). These are homes that have recently sold in the area (typically up to a mile away from the subject property) that have similar features in terms of square footage, such as the number of bedrooms and bathrooms.

### Carrying Costs

Carrying costs are your expenses for holding onto the property. The longer you own the property, the more you will spend on carrying costs, which include:

*   [Mortgage payment](https://www.investopedia.com/terms/p/piti.asp) (including [interest](https://www.investopedia.com/mortgage-rates-5094943))
*   [Property taxes](https://www.investopedia.com/terms/p/propertytax.asp)
*   [Homeowners insurance](https://www.investopedia.com/insurance/homeowners-insurance-guide/)
*   Condo and association fees
*   Utilities (electric, gas, water, sewer, trash)

### Determine Profitability

For an investment to be profitable, the sum of your costs (the purchase price, repair and renovation costs, and carrying costs) must be lower than the ARV. If your costs are close to or higher than the ARV, it will be difficult or impossible to make a profit. You can determine the potential profit by subtracting the purchase price, repair and renovation costs, and carrying costs from the ARV:

> Profit = ARV – Purchase Price – R&R Costs – Carrying Costs

[Real estate investors](https://www.investopedia.com/articles/investing/122415/why-real-estate-risky-investment.asp) might expect to earn at least a 20% profit on a property. Some use guidelines to evaluate properties in various housing markets. Under these guidelines, the total investment (purchase price, repair and renovation costs, and carrying costs) should not exceed:

*   80% of ARV in a market where home values are rising
*   70% to 75% of ARV in a flat market
*   60% to 65% of ARV in a market in which home values are decreasing

If the ARV of a property is $200,000, for example, your total investment should be limited to about $160,000 in a rising market, $140,000 in a flat market, and $120,000 in a market with falling values.

The various investment levels are used to reduce risk in changing market conditions. You can risk more in a rising market because you are more likely to get your ARV or better when you sell. In a falling market, you are less likely to get your ARV, so your investment should be smaller.

## What Is a Short Sale?

In real estate, a short sale may take place when an owner sells a house at a price that is less than the outstanding mortgage amount.

This typically happens when the owner is under financial stress and is behind on mortgage payments. The owner is obligated to sell the home to a third party, with all of the proceeds of the sale going to the lender.

The lender must approve the short sale before it happens. The process can take as long as a year due to the paperwork involved. 

## What Is the Difference Between a Short Sale and a Foreclosure?

In a short sale, the process is initiated by the homeowner to get out of financial trouble and must prove the extent of financial distress through documents submitted to the lender. If the lender agrees to move forward, the homeowner is responsible for finding a buyer.

In a foreclosure, the lender initiates the process of seizing the home and, if necessary, evicting the owner who has failed to make payments. The foreclosure process is generally faster than a short sale, as the lender seeks to liquidate the asset as quickly as possible. 

## Is It a Good Idea to Buy a Short Sale Property?

Buying a short-sale property can be a good deal for a prospective buyer.  However, it is important to be aware of some of the drawbacks involved. Short sales can take a long time. Moreover, if the bank believes that a foreclosure proceeding is a more lucrative option, it may reject the short sale and move forward with foreclosure instead. 

## The Bottom Line

A short sale is when a homeowner sells their house at a price less than the outstanding mortgage amount due to financial distress. Buying a short-sale property can provide an excellent opportunity for investors. A short-sale home might be in better condition than a foreclosed home, resulting in lower repair costs to improve the home's marketability.

However, short sales can be a lengthy process. Contact an experienced real estate agent to help you determine a fair offer and negotiate with the bank. Also, with constantly changing tax laws, consider consulting a [certified public accountant](https://www.investopedia.com/terms/c/cpa.asp) (CPA) familiar with real estate investing and the related tax laws.  

> **Article Sources**
>
> 1.  Consumer Financial Protection Bureau. "[What Is a Short Sale?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-short-sale-en-290/)"
>     
> 2.  New York State Homes & Community Renewal. "[Options for Leaving Your Home and Avoiding Foreclosure](https://hcr.ny.gov/system/files/documents/2018/10/optionsforleavingyourhomeavoidingfc.pdf)." Pages 2-3.
>     
> 3.  Fair Isaac Corporation. "[Research Looks at How Mortgage Delinquencies Affect Scores](https://www.fico.com/blogs/research-looks-how-mortgage-delinquencies-affect-scores)."
>     
> 4.  National Association of Realtors. "[The Short Sale Workflow](https://www.nar.realtor/legal/risk-management/the-short-sale-workflow)."
>     
> 5.  Ramsey. "[What Is a Short Sale?](https://www.ramseysolutions.com/real-estate/what-is-a-short-sale)"
>     
> 6.  NAR. “[National Association of REALTORS Reaches Agreement to Resolve Nationwide Claims Brought by Home Sellers](https://www.nar.realtor/newsroom/nar-reaches-agreement-to-resolve-nationwide-claims-brought-by-home-sellers).”
>     
> 7.  Rocket Mortgage. "[What Is A Short Sale In Real Estate? A Guide To The Process](https://www.rocketmortgage.com/learn/what-is-a-short-sale)."
>     
> 8.  HomeLight. "[Where Can You Find Short Sale Homes? A Finder's Guide for Buyers](https://www.homelight.com/blog/buyer-short-sale-homes/)."
>     
> 9.  National Association of Realtors. "[About SFR](http://realtorsfr.org/about/)."
>     
> 10.  Stessa.com. "[How Investors Estimate and Use After Repair Value (ARV)](https://www.stessa.com/blog/arv-after-repair-value/)."