Short sale in real estate: Meaning, process, potential risks and more

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Quick insights

A short sale happens when a home is sold for less than the amount still owed on the mortgage loan.
This can help homeowners avoid foreclosure, reduce mortgage debt and minimize the long-term impact on their credit.
Short sales can offer discounted prices, providing potential savings for homebuyers who are patient and prepared for the process.

When homeowners can no longer afford mortgage payments, the right next steps to take can vary. Sometimes, a short sale is a real estate transaction that can avoid foreclosure and the negative impacts that come with it. This article will outline how a short sale works, along with some important aspects of the process and consequences.

What is a short sale?

A short sale is a real estate transaction where a homeowner sells their property for less than the amount they owe on their mortgage. This sale repays some of the outstanding debt but will be short by a certain amount. Short sales typically happen when homeowners are on the road to foreclosure and prefer to repay some of an outstanding loan.

Short sale vs. foreclosure

The differences between short sale and foreclosures are primarily in the process and the seller’s involvement. A short sale is a proactive solution to avoid foreclosure, while foreclosure is a consequence of failing to meet mortgage obligations. Below is a more in-depth comparison:

Short sale:

A homeowner sells the property for less than the mortgage amount with lender approval.
Short sales help avoid foreclosure and are less damaging to the homeowner’s credit score.
Allows the lender to recover some investment while providing a buyer a lower price.

Foreclosure:

Lender takes legal action to repossess the property due to missed payments.
A homeowner may lose the property without the opportunity to sell first, possibly resulting in a more severe credit impact.
The process is lengthy and can complicate future loan applications for the homeowner.

Short sale process for seller

Here’s a step-by-step breakdown of the short sale process for the seller:

Assess your financial situation: Before pursuing a short sale, the seller needs to evaluate their financial situation to determine if they truly cannot afford the mortgage payments.
Contact your lender: Reach out to your lender (or mortgage servicer) to discuss your situation. You’ll need to inform them of your situation and explain why you can no longer make mortgage payments. Your lender may assign a specific department or person that can help identify products that may be available.
Hire a real estate agent experienced with short sales: Select a qualified real estate agent who has experience with short sales. They can help guide you through the process, price the home appropriately and market it to potential buyers.
Submit a short sale package to your lender: To start the process, you’ll need to submit a short sale package to the lender. This may vary by lender but often includes:
- A hardship letter explaining why you’re unable to pay your mortgage.
- Proof of income (pay stubs, tax returns).
- A financial statement showing assets, debts and expenses.
- The listing agreement with your real estate agent.
List the property for sale: Once the loan provider has approved your short sale request, your real estate agent can list your property for sale. If the lender provided any listing requirements, they’re important to follow.
Receive and review offers: As offers come in, your agent will present them to you and your lender. The lender will review the offers to ensure they are acceptable and will likely negotiate the price. In some cases, the lender may request multiple offers before deciding.
Lender approval: After reviewing the offers, the lender will approve or deny the sale. This step can take some time, and it’s common for lenders to request additional documentation or negotiation. Once a lender approves the offer, they will issue a formal agreement.
Close the sale: After receiving lender approval, the sale proceeds. You will sign the closing documents, and the buyer will take possession of the property. The lender receives the proceeds from the sale, but it’s typically less than the outstanding mortgage balance.
Forgiveness of remaining debt (possibly): In some cases, the lender may forge the remaining mortgage debt after the short sale. This depends on the lender’s policies and local laws. This is not guaranteed, so sellers should clarify the terms with their lender.
Impact on credit and taxes: While a short sale is less damaging than foreclosure, it will still negatively impact your credit score. Additionally, there could be tax consequences since the forgiven debt might be considered taxable income, though there are certain exceptions and exclusions under the law. Consult with a tax professional for specifics.

How to buy a short sale home

Here’s how a short sale process may work for the buyer:

Seek out short sales in your desired area. You can find applicable homes using a qualified short sale home agent, typically by searching online or looking through local public courthouse files.
Research home values. Based on the above research, if the seller owes more to the home than it is worth, this means they don’t carry any equity.
Visit the house. Assess the quality of the property and get a sense of how much you’ll need to fix up and estimate the costs, so you know what you’re getting yourself into.
Sort out liens and outstanding items with the lender. Before committing yourself as the official owner, make sure loose ends are tied up so that you’re free to move forward once the sale is official.
Present paperwork and negotiate terms. Gather necessary paperwork and submit it to the lender. A lawyer or real-estate agent may be able to assist. Since the lender is agreeing to sell the home for less than the original purchase price, be prepared to negotiate and determine the maximum you’re willing to pay.
Shop around and prequalify for a mortgage. Presenting your financing to the seller and lender proves your financial capabilities and can help expedite the process.
Sign on the dotted line. Once the seller, buyer and lender are aligned, you can officially sign the papers, transfer the title and close on the property. Congratulations on being a new homeowner!

The pros and cons of a short sale

Short sales can be a viable option for homeowners who are underwater on their mortgage. However, short sales come with complex potential risks . Here are a few key pros and cons:

Pros of a short sale

Avoid foreclosure: Less credit damage than foreclosure.
Debt relief: Possible forgiveness of remaining mortgage balance.
Faster process: Can be quicker than foreclosure.
Emotional relief: Closure for struggling homeowners.

Cons of a short sale

Credit impact: Still hurts credit.
Lender approval: No guarantee of approval.
Tax implications: Forgiven debt may be taxed.
Potential deficiency judgment: Lender may pursue remaining balance.
Emotional stress: The process can be stressful.

Things to consider when buying a short sale home

Buying a short sale property can offer great deals, but it comes with risks and challenges. Here’s what to consider:

Risks of buying a short sale home

Long approval process: Lender approval can take weeks or months. Lender approval time will vary case by case.
Property condition: Homes are sold “as-is” with no repairs from the seller.
Uncertainty: No guarantee the lender will approve your offer.
Liens and taxes: Unpaid taxes or liens may become your responsibility.

Tips for buying a short sale home

Work with an experienced agent: They can guide you through the complexities.
Get preapproved: Shows you’re a serious buyer, which may speed up the process.
Conduct inspections: Assess the home’s condition to avoid hidden costs.
Be patient: The process can take time, so be ready for delays.

FAQs about short sales

If you’re considering buying a short sale home, you may have several questions about the process. Here are some questions to help guide you:

How often do banks accept short sale offers?

Banks accept offers when it’s more cost-effective than foreclosure, but approval depends on the property and offer terms.

How long does a short sale take?

Typically, 3 to 6 months but can take longer due to lender approval and negotiations.

How to find short sale homes?

Search with real estate agents, online listings or bank websites.

Will a short sale affect your credit?

Yes, it impacts credit, but less severely than foreclosure.

Can you finance a short sale?

Yes, you can finance a short sale with a traditional mortgage.

Are short sale prices negotiable?

Yes, they’re often negotiable depending on the lender and market conditions.

Are short sales worth it?

They can be, but the details of the process and experience will vary.

Can a first-time homebuyer buy a short sale?

Yes, though it may require more patience and paperwork.

What are alternatives to a short sale?

Foreclosure, deed-in-lieu or loan modification are alternatives to a short sale.