A short sale occurs when you sell your home for less than your mortgage balance, and your lender agrees to accept the sale proceeds as full (or partial) satisfaction of the debt. The lender takes a "short" payoff — hence the name. It requires lender approval because they're accepting less than they're owed.
| Factor | Short Sale | Foreclosure |
|---|---|---|
| Who Initiates | You (the homeowner) | The lender |
| Credit Impact | 100-150 point drop; 2-4 years impact | 200-300 point drop; 7 years impact |
| Future Mortgage | Wait 2-4 years (FHA: 2 yrs; Conventional: 4 yrs) | Wait 3-7 years (FHA: 3 yrs; Conventional: 7 yrs) |
| Control | You control the sale process | Lender controls; you're evicted |
| Deficiency Judgment | Often waived in negotiation | Lender may pursue deficiency |
1. Prove Hardship: Submit a hardship letter explaining why you can't pay — job loss, medical emergency, divorce, etc. Without a legitimate hardship, the lender won't approve a short sale.
2. List the Property: Work with a real estate agent experienced in short sales. Price at or slightly below market to attract offers quickly.
3. Submit Offer to Lender: Once you have an offer, submit a complete short sale package: purchase contract, hardship letter, financial statements, bank statements, tax returns, pay stubs, and a net sheet showing what the lender will receive.
4. Lender Review (30-90 days): The lender reviews the package, may order a BPO (Broker Price Opinion) to confirm the home's value, and negotiates terms. This is the longest and most frustrating phase.
5. Lender Approval: Lender issues a short sale approval letter with terms: accepted payoff amount, whether they'll pursue a deficiency judgment, and any relocation assistance offered.
6. Close the Sale: Standard closing process. You walk away without the mortgage debt (mostly — depending on deficiency terms).
If the sale price doesn't cover your mortgage balance, the lender may pursue a deficiency judgment for the remaining amount. Example: $300,000 mortgage, sale for $250,000 = $50,000 deficiency. In some states, lenders can sue you for this amount. In other states (non-recourse states like California for purchase-money loans), they cannot. Always negotiate a deficiency waiver as part of your short sale approval. Get it in writing. Even if waived, the IRS may treat forgiven debt as taxable income (though the Mortgage Forgiveness Debt Relief Act may exclude it — check current law with a tax professional).