Short Sale
A short sale is when a homeowner sells their property for less than what they owe on the mortgage — and the bank agrees to accept the reduced amount instead of foreclosing. It’s called “short” because the sale comes up short of the loan balance.
Say a homeowner owes $320,000 but their home is only worth $260,000. In a short sale, the bank agrees to let them sell for $260,000 and writes off the $60,000 difference (or negotiates a settlement). The homeowner avoids foreclosure. The buyer gets a discount. The bank avoids the cost and hassle of repossessing the property.
How the Short Sale Process Works
Step 1: The homeowner proves financial hardship to their lender — job loss, medical bills, divorce, or an underwater mortgage. They submit a hardship letter, financial statements, tax returns, and bank statements.
Step 2: The home gets listed, typically at or slightly below market value. A buyer makes an offer.
Step 3: The seller’s agent submits the offer to the bank’s loss mitigation department. The bank orders its own appraisal or BPO (Broker Price Opinion) to verify the home’s value.
Step 4: The bank accepts, counters, or rejects the offer. This is where patience gets tested.
The Timeline Problem
Short sales are slow. The bank isn’t motivated to move fast because they’re taking a loss either way. Expect 60–120 days for a response — sometimes longer. The average short sale takes 90–180 days from offer to closing. Compare that to 30–45 days for a traditional purchase.
During that waiting period, you’re in limbo. You can’t lock an interest rate for 120 days. The property might deteriorate if the owner stops maintaining it. And the bank can reject your offer with no explanation, sending you back to square one.
Short Sale vs. Foreclosure
| Factor | Short Sale | Foreclosure |
|---|---|---|
| Timeline to buy | 90–180 days | 30–90 days (auction/REO) |
| Condition of property | Usually maintained | Often neglected or vandalized |
| Discount from market value | 5%–15% | 10%–30% |
| Inspection possible | Yes | Limited or none at auction |
| Title issues | Less common | More common |
| Negotiation room | Minimal — bank sets floor | Varies |
Tips for Buying a Short Sale
- Keep your pre-approval letter current — if the bank takes 90 days to respond, your letter might expire
- Don’t stop looking at other homes while you wait. Keep shopping
- Have your agent check whether the bank has already approved a price range — these “pre-approved” short sales close much faster
- Budget for repairs. Short sale homes are often sold as-is
Real-World Example
A homeowner owes $320,000 on their mortgage but the home is now worth only $270,000 after a market decline. They can no longer afford the payments and approach their lender about a short sale. After extensive documentation (hardship letter, financials, tax returns), the lender agrees to accept $260,000 from a buyer and forgive the remaining $60,000 deficit. The process takes 4-6 months because the lender must approve the sale price. The seller avoids foreclosure and its 7-year credit impact — a short sale typically remains on credit for 4 years with a 50-100 point score reduction.
Related Terms
Understanding short sale connects to several other concepts: Foreclosure, Lien, Equity, and REO. Each of these terms interacts with short sale in ways that affect your buying power, monthly costs, or investment returns.
Frequently Asked Questions
Can I negotiate the price on a short sale?
Very little. The bank is already accepting a loss. They’ve determined the minimum they’ll take based on their own valuation. You might get $5,000–$10,000 off their approved price, but low-ball offers usually get rejected outright. Focus your negotiation on closing cost credits or repair allowances instead. Use our closing cost calculator to budget for the full transaction.
Can I buy a short sale property?
Yes, but be prepared for a slow process. The seller’s lender must approve the price, which can take 2-6 months after your offer is accepted. Short sales are often sold as-is with limited seller disclosures. Financing a short sale purchase is possible but requires a patient lender willing to wait for the seller’s bank to respond.
Does the seller owe taxes on forgiven short sale debt?
Potentially. The IRS may treat forgiven debt as taxable income. However, exceptions exist for primary residences (Mortgage Forgiveness Debt Relief Act, when in effect) and for insolvent borrowers. Consult a tax professional before proceeding — the tax bill on $60,000 of forgiven debt could be $10,000-$15,000 depending on your bracket.