How Does the Short Sale Process Work?
The homeowner lists the home for sale and finds a buyer. The purchase offer is submitted to the lender along with a hardship letter, financial statements, and supporting documentation. The lender's loss mitigation department reviews the file and decides whether to approve the sale at the offered price. The process typically takes three to six months — much longer than a conventional sale.
How Does a Short Sale Affect Your Credit?
A short sale appears as 'settled for less than full amount' on your credit report and can drop your score by 75 to 150 points. This is less damaging than a foreclosure but still significant. You may qualify for a new conventional mortgage in two to four years after a short sale, compared to seven years for a foreclosure. FHA loans may be available sooner if payments were current through the short sale.
What Are the Tax Implications of a Short Sale?
The forgiven debt amount — the difference between what you owed and what the lender received — may be treated as taxable income. The Mortgage Forgiveness Debt Relief Act has historically exempted primary residence debt from this tax, but the law has periodically expired and been renewed. Consult a tax professional to understand current law and whether you qualify for any exclusions.
Frequently asked questions
Is a short sale better than foreclosure?
Generally yes, for both the homeowner and lender. Short sales cause less credit damage, allow more control over the timeline, and avoid the public stigma and legal complexity of foreclosure. However, lender approval is not guaranteed, and the process is slow.
Can the lender sue you for the remaining balance after a short sale?
Some lenders reserve the right to pursue a deficiency judgment for the unpaid balance. It's generally recommended to negotiate a full waiver of the deficiency as a condition of lender approval. State laws vary — some states prohibit deficiency judgments on short sales entirely.