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Short Sale

In short

A short sale is the sale of a home for less than the amount owed on its mortgage, with the lender's approval. The lender agrees to accept the reduced proceeds to avoid a foreclosure.

Who must approve
The lender (and any junior lienholders)
Typical approval time
Several weeks to several months
Seller's situation
Owes more than the home is worth
Condition
Usually sold as-is

Where it fits in a foreclosure

Short Sale belongs to the pre-foreclosure stage.

  1. 1Missed paymentsThe owner falls behind; the servicer sends notices and may offer workout options.
  2. 2Pre-foreclosureA notice of default or lis pendens is filed. The owner can still sell, catch up or negotiate.You are here
  3. 3AuctionThe property goes to a public sale, usually for cash, as-is and often without an inspection.
  4. 4Bank-owned (REO)If no one outbids the lender, it takes the property back, clears most title issues and lists it.
  5. 5ResaleA buyer or investor purchases, repairs and occupies, rents or resells the home.

How a short sale works

The homeowner lists the property, usually with an agent experienced in short sales. When an offer comes in, the owner submits it to the lender with a hardship letter and financial documents. The lender orders its own valuation and decides whether to approve the price. If there is a second mortgage or other liens, each lienholder must also agree to release its claim.

What it means for the seller

A short sale lets an owner avoid a completed foreclosure, though it still affects credit. The lender may or may not waive the remaining balance. In some states it can pursue a deficiency judgment unless the approval letter waives it, and forgiven debt can have tax consequences. Owners should get legal and tax advice.

Buying a short sale

Buyers make an offer to the owner, but the deal is not final until the lender approves it in writing. Expect a long wait, possible counteroffers from the lender, and an as-is sale. Keep your earnest money protected with clear contingencies, and be ready for the possibility that the lender declines or the property goes to auction first.

Example

A short sale by the numbers

An owner owes $310,000, but comparable homes sell for about $270,000. A buyer offers $262,000. After about 10 weeks, the lender's valuation comes in at $268,000 and the lender counters at $266,000. The buyer accepts. After closing costs and agent commissions, the lender nets about $245,000 and releases its lien, accepting a loss of roughly $65,000 instead of foreclosing.

Short Sale vs. Foreclosure

Short Sale

A short sale is the sale of a home for less than the amount owed on its mortgage, with the lender's approval. The lender agrees to accept the reduced proceeds to avoid a foreclosure.

Foreclosure

Foreclosure is the legal process a lender uses to take back and sell a property after the borrower stops making mortgage payments, so the lender can recover what it is owed.

The differenceIn a short sale the owner sells the home, with lender approval, before foreclosure is completed. In a foreclosure the lender forces a sale at auction.

Frequently Asked Questions

Related terms

Pre-ForeclosureForeclosure processPre-foreclosure is the period after a lender files a default notice or foreclosure lawsuit but before the property is sold at auction. The owner still holds title and can sell or catch up.Deed in Lieu of ForeclosureForeclosure processA deed in lieu of foreclosure is an agreement in which a borrower voluntarily transfers ownership of a home to the lender to settle the mortgage and avoid the foreclosure process.Deficiency JudgmentForeclosure processA deficiency judgment is a court ruling that makes a borrower personally liable for the remaining mortgage debt when a foreclosure sale brings in less than the amount owed.As-Is SaleBuying & closingAn as-is sale means the seller will not make repairs or offer credits for the property's condition. The buyer accepts the home in its current state, though inspection rights and required disclosures may still apply.LienTitle & legalA lien is a legal claim against a property that secures a debt. It must usually be paid off before the property can be sold with clear title, and the creditor can force a sale in some cases.Loan ModificationForeclosure processA loan modification is a permanent change to a mortgage's terms, such as a lower rate, longer term or added past-due amounts, that a lender agrees to so a struggling borrower can afford payments.Notice of DefaultForeclosure processA notice of default (NOD) is a public notice, recorded with the county, stating that a borrower has fallen behind on a mortgage or deed of trust and that the lender may move toward foreclosure.Home EquityMortgages & financingHome equity is the portion of a property you own outright: its current market value minus everything owed on it. It grows as you pay down the loan and as the home's value rises.

Learn more in the knowledge base

How to Buy a Pre-Foreclosure Home: A Step-by-Step GuideGuide · 6 min readBuying a pre-foreclosure means negotiating with an owner who is behind on the mortgage, before the lender sells the home at auction. The deal can close as a normal equity sale or as a short sale that needs the lender's approval. This guide walks through each step, from research to a clean closing through escrow.How to Make an Offer on a House and NegotiateGuide · 8 min readAn offer is more than a price. The deposit, contingencies, timeline and requests you include all shape whether the seller says yes and how protected you are afterwards. This guide explains each term and how negotiation usually unfolds.Closing a Pre-Foreclosure Before the Foreclosure Sale DateGuide · 6 min readIn a pre-foreclosure, the foreclosure sale date is the deadline that matters most, and a signed contract does not move it. This guide covers how to plan the closing backward from that date, keep payoffs and short sale approvals current, seek a postponement properly, meet state rules at closing and protect yourself if the sale date arrives first.
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Disclaimer: The information on this page is for general educational purposes only and is not legal, financial, tax or investment advice. Laws, lending rules and market conditions vary by state and change over time, and any figures shown are estimates. Before you buy, sell, finance or bid on a property, consult a qualified attorney, financial advisor, lender or licensed real estate professional about your situation.