What You Should Know Before Listing Your Home for Short Sale

16 June 2025

Selling a home is never a simple decision, and when you're considering a short sale, the stakes are even higher. A short sale can be a lifesaver if you're struggling with mortgage payments and need to avoid foreclosure, but it’s not as straightforward as putting a "For Sale" sign in your yard.

If you're thinking about listing your home for a short sale, you’ll need to understand the process, the potential challenges, and how it will impact your financial future. So, let’s dive into everything you should know before making this decision.

What is a Short Sale?

A short sale happens when you sell your home for less than what you owe on the mortgage. This means the lender agrees to accept a reduced payoff amount instead of foreclosing on the property. Sounds like a great deal, right? Well, it can be—but it’s not a simple process.

A short sale requires lender approval, tons of paperwork, and patience. It can also have long-term financial consequences, so you need to weigh your options carefully before moving forward.

Why Would Someone Choose a Short Sale?

There are several reasons why homeowners consider short selling their property, including:

- Financial Hardship – Job loss, medical bills, or other financial struggles can make it impossible to keep up with mortgage payments.
- Market Decline – If home prices in your area have dropped significantly, you might owe more on your mortgage than your home is worth (negative equity).
- Avoiding Foreclosure – A short sale is often less damaging to your credit than foreclosure.
- Relocation Needs – You may need to relocate for work or personal reasons, and selling at a loss may be your only option.

While a short sale may seem like an easy way out, it comes with its own challenges. Let’s break down what you should know before taking this route.

Things You Should Know Before Listing Your Home for Short Sale

1. Not Every Home Qualifies for a Short Sale

Just because you want to sell your house for less than what you owe doesn’t mean the bank will agree. Lenders typically approve short sales only if:

- You have a legitimate financial hardship (job loss, divorce, medical emergency, etc.).
- Your mortgage is underwater (you owe more than the home is worth).
- You have no other substantial assets that could cover the mortgage debt.
- Your lender believes a short sale is a better option than foreclosing.

Expect to submit detailed documentation, including bank statements, tax returns, and proof of hardship.

2. The Short Sale Process Takes Time

Unlike a traditional home sale, which can close in 30–60 days, a short sale can take several months or even longer. Why? Because the lender has to review and approve the sale, which involves:

1. Receiving an Offer – The buyer submits an offer, but the lender has the final say.
2. Lender’s Review – The bank assesses the offer, evaluates the property’s value, and determines whether the deal makes sense.
3. Negotiations – The lender may counter the buyer’s offer or refuse it altogether.
4. Approval & Closing – If accepted, the transaction moves forward, but this can still take weeks or months.

If you’re hoping to sell quickly, a short sale might not be the best option.

3. Your Credit Score Will Take a Hit

One common misconception is that a short sale won’t affect your credit score. Unfortunately, it will—but not as badly as a foreclosure.

A short sale may lower your credit score by 50 to 150 points, depending on your financial history and how your lender reports the transaction. However, compared to foreclosure (which can drop your score by 200+ points), a short sale is the lesser of two evils.

That said, a short sale will remain on your credit report for up to seven years, making it harder to qualify for loans in the future.

4. You Might Owe Money After the Sale

Many homeowners assume that once the bank approves the short sale, they're free and clear. Not so fast! Some lenders pursue a deficiency judgment, meaning they'll try to collect the remaining balance after the sale.

For example, if you owe $250,000 on your mortgage but sell for $200,000, the lender could try to collect the remaining $50,000.

- Some states prohibit lenders from going after borrowers for the balance.
- Others allow lenders to sue for the unpaid amount (deficiency judgment).

Before listing your home for a short sale, consult a real estate attorney to understand your legal obligations.

5. The IRS Might Consider Your Canceled Debt as Taxable Income

Here’s a kicker many homeowners don’t see coming: the IRS may tax the forgiven debt from your short sale.

If you sold your home for less than you owed, the difference is considered canceled debt, and the IRS might view it as taxable income.

The good news? Some exemptions exist, like the Mortgage Forgiveness Debt Relief Act (which was previously extended). However, always consult a tax professional to know where you stand.

6. Finding the Right Buyer Can Be Challenging

Since short sales take longer, not all buyers are willing to wait. Many buyers prefer traditional home sales because they’re quicker and more predictable.

To increase your chances of selling, consider:

- Pricing the Home Competitively – A real estate agent can help set a price that attracts buyers while still being acceptable to the lender.
- Working with an Experienced Agent – Not all agents specialize in short sales. Find someone with experience in navigating the process.
- Being Transparent – Let buyers know upfront that this is a short sale, so they understand the potential delays.

7. Your Lender Might Offer Alternatives

If a short sale seems daunting, talk to your lender about other options. They may offer alternatives such as:

- Loan Modification – Adjusting your loan terms to make payments more manageable.
- Forbearance – Temporarily reducing or pausing your payments until you get back on track.
- Deed in Lieu of Foreclosure – Handing the home’s title back to the lender to avoid foreclosure.

A short sale is not the only solution, so explore all possibilities before making a decision.

Final Thoughts

Listing your home for a short sale can be a viable way to avoid foreclosure and move on from an unaffordable mortgage, but it’s not without risks. It takes time, impacts your credit, and comes with potential financial consequences.

Before proceeding, consult with a real estate agent, attorney, and tax professional to fully understand your options. If done correctly, a short sale can be a fresh start rather than a financial disaster.

Have you gone through a short sale? Share your experience in the comments below!