Written by James Chae — Co-Founder, Expert Sapiens
Reviewed March 2026
Real Estate
Definition
A real estate transaction where a lender agrees to accept less than the full mortgage balance owed as full settlement, allowing a financially distressed homeowner to sell rather than face foreclosure.
A short sale occurs when a homeowner who owes more on their mortgage than the property is currently worth (a condition called being 'underwater' or having 'negative equity') sells the home with the lender's approval for less than the outstanding loan balance. The lender agrees to accept the proceeds as full or partial satisfaction of the debt, allowing the homeowner to exit the property without completing a formal foreclosure.
To qualify for a short sale, the homeowner typically must demonstrate financial hardship — job loss, medical emergency, divorce, death of a spouse, or other circumstances that prevent continued mortgage payments — and provide documentation including a hardship letter, financial statements, tax returns, and bank statements. The lender reviews whether a short sale makes more financial sense than foreclosure, which is expensive, time-consuming, and results in a property that the lender must manage and sell.
From a buyer's perspective, short sale properties can be purchased at below-market prices, but the process comes with significant complexity. The buyer's offer must be approved not just by the seller but by the lender — and sometimes by a second lienholder if a HELOC or second mortgage exists. Lender review can take weeks to months, and the lender may counter at a higher price or reject the sale entirely. Short sale properties are also sold as-is, with no seller repairs or credits.
The credit impact for the seller of a short sale is significant but generally less damaging than a full foreclosure. A short sale typically results in a credit score drop of 100 to 150 points and appears on the credit report for seven years, though waiting periods for new mortgage eligibility (typically 2 to 4 years) are shorter than after foreclosure.
Short sales are among the most legally and financially complex transactions in residential real estate. Sellers must navigate lender negotiations, potential tax liability on forgiven debt (which may qualify as canceable debt income under the Mortgage Forgiveness Debt Relief Act), and potential deficiency judgments if the lender does not fully forgive the remaining balance. Getting these details wrong can result in unexpected tax bills or continued legal liability years after the sale.
A real estate professional with short sale experience is essential for managing lender communications and keeping the transaction from falling apart during the lengthy approval process. A tax professional should also be consulted to understand the forgiven-debt tax implications, which vary depending on whether the property was a primary residence, the state of purchase, and current federal law.
Written by James Chae — Co-Founder, Expert Sapiens
Reviewed March 2026