A short sale in real estate is when a homeowner sells a property for less than the mortgage still owed, and the lender agrees to accept that lower amount. The lender has to approve the sale, which is why it usually takes longer than an ordinary sale. It's different from a foreclosure, where the lender takes the property back.
Homeowners usually turn to a short sale when they can't keep up with payments and can't sell for enough to clear the loan. Lenders often agree because a short sale can mean a smaller loss than a drawn-out foreclosure, but they're never obliged to.
How a short sale works, step by step
- Hardship: the homeowner explains to the lender why they can't pay, such as job loss, illness, divorce or a big rise in payments. The lender usually asks for a hardship letter, income details and bank statements.
- Listing: the home goes on the market, normally with an agent, and the listing says it's a short sale subject to lender approval.
- Offer: a buyer makes an offer and the seller accepts it, but only on the condition that the lender agrees.
- Lender review: the lender looks at the offer, often orders a valuation, and may need sign-off from other parties, such as a second mortgage holder or a mortgage insurer. This can take weeks or months.
- Closing: if the lender approves, the sale closes. The lender then decides what happens to any remaining balance. See the seller section below.
The key point is that the seller doesn't have the final say. Until the lender approves in writing, the deal isn't secure for anyone.
Lenders usually weigh a few things before they agree: whether the hardship looks credible, what the home is worth today, how the offer compares with that value, and what they'd likely recover through foreclosure instead. A well-prepared file with complete paperwork tends to move faster than a patchy one.
Short sale vs foreclosure vs bank-owned sale
These three get mixed up all the time. They're different routes for a home where the owner owes more than it's worth, or can't pay.
| Short sale | Foreclosure | Bank-owned (REO) sale | |
|---|---|---|---|
| Who sells | The owner, with the lender's approval | The lender, through a legal process, often by auction | The lender, after it has taken the property back |
| Who owns it while it's sold | The owner | The owner until the process ends | The lender |
| Speed | Often slow, because of lender review | Set by the local legal process | Usually quicker once listed |
| Effect on the owner's credit | Damaging, but usually seen as less severe than foreclosure | Usually the most severe | The damage has already happened |
| Typical buyer experience | Patience needed, sold as-is | Can mean limited access and a sale as-is | Often sold as-is, with the lender handling paperwork |
Rules and terminology vary by state and lender, so use this table as a rough guide only.
A short sale for buyers
A short sale can open the door to a home at a price below what similar homes fetch, but it's not always a bargain and it's rarely quick.
The upsides
- The price may be lower than comparable homes, though the lender will usually try to get close to market value.
- There can be less competition, because many buyers don't want to wait.
- The home is often occupied and maintained by the owner, so it may be in better shape than a repossessed property.
The downsides
- The wait. Approval can take a long time, and the lender can say no or counter your offer.
- As-is condition. The seller or lender may refuse to pay for repairs.
- Uncertainty. You may not have a firm closing date until late in the process.
Protect yourself
Get a home inspection even if the property is sold as-is, so you know what you're taking on. Ask your agent to check the title for liens or other loans on the property. Avoid giving notice on your rental or committing to a move date until the lender has approved in writing. A buyer's agent who has closed short sales before is worth finding.
A short sale for sellers
For a struggling homeowner, a short sale can be a way out that avoids a foreclosure, but it comes with consequences you should understand first.
- Credit impact: a short sale will usually lower your credit score, though often less than a foreclosure would. The effect and how long it lasts depend on your credit history and the lender.
- Deficiency: the gap between what you owed and what the home sold for is called the deficiency. In some cases the lender waives it, in others it may seek the difference. Rules vary by state, so get any waiver in writing before you close.
- Tax: in some cases, debt the lender forgives can be treated as taxable income, although exceptions exist. Ask a tax professional before you agree to a deal.
- Timing: you can't treat a short sale as a quick exit. Keep paying what you can if the lender asks, and respond fast to every request for documents.
Who to talk to
- An agent with short sale experience, because the process is slower and more paperwork-heavy than an ordinary sale.
- A real estate attorney if you're a seller or a buyer in a complicated deal, especially on deficiency and liens.
- A tax professional, for questions about forgiven debt.
- In the US, a HUD-approved housing counselor. The Department of Housing and Urban Development keeps a list of approved agencies that can talk through your options.
- Be careful with anyone who promises to save your home in return for money upfront. Check them out first.
If you're a landlord or investor wondering whether a distressed property could become a rental, my guide to managing a rental property covers the day-to-day side.
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Is there a UK version?
Not under that name. 'Short sale' is mostly an American term. In the UK, a homeowner who's behind on a mortgage should contact their lender early. Lenders can sometimes agree a payment plan, a change of terms or a managed sale. Free debt advice services such as MoneyHelper, StepChange and Citizens Advice can explain your options without judgement.
If you work in property and want to share your expertise, here's how to write for my real estate section.
This is general information, not legal or financial advice. Rules differ by country and state, so check with a qualified professional.
Frequently asked questions
What is a short sale in real estate in simple terms?
It's when a home sells for less than the owner owes on the mortgage, and the lender agrees to accept the lower amount as payment.
Is a short sale better than foreclosure?
For many owners it's less damaging to credit and gives more control, but each situation differs. A lawyer or housing counselor can help you compare.
How long does a short sale take?
It varies. Lender review often adds weeks or months to the usual sale process, so patience is needed.
Do I still owe money after a short sale?
Possibly. Some lenders waive the remaining balance and some don't, and state rules differ. Get any waiver in writing before closing.
