Short Sale

How a Short Sale Works

A short sale requires the borrower to demonstrate financial hardship, typically through documentation such as a hardship letter, bank statements, tax returns, and proof of income or unemployment. The borrower lists the property on the open market and submits any purchase offer to the lender for review. The lender's loss mitigation department evaluates the offer against a broker price opinion (BPO) or appraisal to determine whether the net proceeds exceed what the lender would recover through foreclosure after accounting for legal costs, holding costs, and property deterioration. The approval process can take 30 to 120 days or longer .

Deficiency Judgments and Tax Implications

When a lender accepts a short sale, the difference between the sale price and the outstanding mortgage balance is the deficiency. In some states, the lender may pursue a deficiency judgment against the borrower for this amount; other states prohibit or limit deficiency judgments on certain types of mortgages . Additionally, the forgiven debt may be treated as taxable income by the IRS. Borrowers should consult a tax professional to determine whether any exclusion applies under the Mortgage Forgiveness Debt Relief Act or insolvency provisions .

Impact on Future Mortgage Eligibility

A short sale carries shorter waiting periods for future mortgage eligibility compared to foreclosure. Conventional loans require a 4-year waiting period after a short sale (2 years with extenuating circumstances) . FHA, VA, and USDA programs generally require shorter waits. The short sale appears on the borrower's credit report for seven years but is typically less damaging to the credit score than a completed foreclosure, particularly if the borrower remained current on other obligations during the process.