Real Estate Law · Haute Lawyer Network
What Is a Short Sale in Real Estate?
Last reviewed: June 2026
A short sale occurs when a homeowner sells their property for less than the outstanding mortgage balance, with the lender's prior approval to accept the sale proceeds as full or partial satisfaction of the debt.
Short sales are used when a homeowner is in financial distress, owes more on the mortgage than the property is currently worth (underwater), and cannot afford to continue making payments or to sell at full price.
A short sale requires lender approval because the lender is agreeing to take less than they are owed. The process involves the seller submitting a short sale package to the lender — including a hardship letter, financial documents, and a purchase offer from a buyer — and waiting for the lender to approve or counter the proposed sale price.
Short sale approval can take weeks to months depending on the lender, the complexity of the transaction, and whether mortgage insurance is involved.
Frequently Asked Questions
What is the difference between a short sale and foreclosure?
A short sale is a voluntary sale with lender approval — the homeowner initiates the process and maintains some control over the outcome. Foreclosure is involuntary — the lender takes back the property through a legal proceeding. A short sale is generally less damaging to credit than foreclosure.
Will I owe taxes on a forgiven short sale balance?
The forgiven debt — the difference between what you owed and what the lender accepted — may be treated as taxable income. Exclusions may apply for a primary residence under certain circumstances. Consult a tax professional.
Can the lender sue me for the deficiency after a short sale?
Depends on state law and the terms of the short sale approval. Many short sale approvals include a waiver of the deficiency. Some states have anti-deficiency statutes that limit or prohibit deficiency judgments.
How does a short sale affect my credit?
A short sale appears on your credit report as a significant negative item but is generally less damaging than a foreclosure. The credit impact fades over time — most buyers can qualify for a new mortgage 2-4 years after a short sale.
Do I need an attorney for a short sale?
An attorney or experienced real estate agent who specializes in short sales is strongly recommended. The process involves lender negotiations, tax implications, and legal documents that benefit from professional guidance.
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