Should I Do a Short Sale?

How does a short sale work?

A short sale Selling your home for less than you owe on the mortgage, with the lender's approval. Less damaging to your credit than a foreclosure. Learn more → is a sale of your home for less than what you owe on your mortgage. If your lender or servicer agrees, the sale can pay off your mortgage even when the price falls short of the balance. Because it's a sale, you'll have to leave your home. That's how the Consumer Financial Protection Bureau (CFPB), a federal agency, explains it.

You find the buyer. Your servicer The company that collects your monthly mortgage payments. This may not be the same company that originally gave you the loan. Learn more → , the company you send your payment to, has to approve the deal. The steps usually run like this:

1. Ask your servicer to review you for a short sale. Expect to send paperwork on your income and your hardship.
2. List the home and accept an offer that depends on the lender's approval.
3. Send the offer to your servicer. For a Fannie Mae loan, the servicer has to answer in writing within 30 calendar days of getting the first offer and, if it needs one, your complete application (Fannie Mae Servicing Guide D2-3.3-01).
4. Read the approval before you sign. Look for what it says about the leftover balance.
5. Close and move out. A Fannie Mae short sale has to close within 60 calendar days of the servicer's approval, unless Fannie Mae agrees in writing to more time (D2-3.3-01).

Can I do a short sale with my loan?

It depends on who owns or backs your loan. Your servicer can tell you.

Fannie Mae

• If you're current or less than 90 days behind, the servicer reviews you based on a complete application, the paperwork on your finances and hardship. If you're current or less than 60 days behind, it also has to find that you're in imminent default, meaning a hardship will keep you from making your payments soon.
• If you're more than 18 months behind, it can review you without a complete application.
• It checks whether you'll have to put in cash of your own (D2-3.3-01).

Freddie Mac

Freddie Mac defines a standard short sale as selling the home for less than it takes to pay off the mortgage. Servicers can approve some on their own, within limits Freddie Mac sets, and the rest go to Freddie Mac for review (Freddie Mac). Its public summary doesn't list the detailed rules, so ask your servicer what applies.

FHA: the pre-foreclosure sale

• The Federal Housing Administration (FHA) calls it a pre-foreclosure sale: a sale that brings in less than you owe, where the lienholders agree to release their liens and forgive the leftover balance.
• The standard version is open whether or not you live in the home. The U.S. Department of Housing and Urban Development (HUD) doesn't require proof of hardship, but you do have to say you have one that affects your ability to keep up the mortgage.
• You have to be at least 61 days behind when the servicer approves you, and you have to have used up, or not qualified for, FHA's permanent options to keep the home.
• A streamlined version for servicemembers can be offered when permanent change-of-station orders require a move to a new duty station at least 50 miles away (HUD Handbook 4000.1).

VA

With a loan backed by the Department of Veterans Affairs (VA), if your servicer agrees to a short sale, it accepts the total proceeds from the sale as full payment, even if that's less than you owe. It could cost you some or all of your future VA home loan benefit, and to restore it you'd need to pay back what VA lost on your loan (VA).

USDA

• For a loan guaranteed by the U.S. Department of Agriculture (USDA), the lender has to try its options to catch you up first. To qualify for a pre-foreclosure sale, you need to be at least 30 days behind or in imminent default, among other conditions, and the price has to reflect the home's fair market value (7 C.F.R. § 3555.305).
• For a USDA direct loan, made by USDA itself, you can sell for at least the value USDA works out, called net recovery value, and put the money toward the loan (7 C.F.R. § 3550.211).

Other loans

Loans a bank keeps for itself, and private loans, follow the lender's own rules.

Will I still owe the rest?

Maybe. The gap between the sale price and what you owe is the leftover balance, also called the deficiency. In some states, a lender can sue you for it after a short sale, and a court order to pay it is a deficiency judgment A court order requiring you to pay the difference between what you owed on your mortgage and what the home sold for at auction. Not allowed in all states. Learn more → . A deficiency waiver means the lender gives up its right to collect it. If you get one, get it in writing and keep it (CFPB).

• Fannie Mae: on a loan with no mortgage insurance, the servicer must release you from the leftover balance once the short sale is done, and it must give you a waiver at closing when one applies (D2-3.3-01). With mortgage insurance, it can depend on the insurer.
• FHA: a pre-foreclosure sale is, by definition, one where the lienholders forgive the leftover balance (HUD Handbook 4000.1).
• VA: the servicer accepts the sale proceeds as full payment. Getting your full VA home loan benefit back is separate, and means repaying what VA lost (VA).
• USDA direct: USDA may go after the leftover balance unless you had a payment moratorium at some point during the loan and tried in good faith to repay it (7 C.F.R. § 3550.211).
• Freddie Mac, USDA guaranteed and other loans: it comes down to what the lender puts in writing.

What about a second mortgage?

A second mortgage or home equity line has to be dealt with too. Under Fannie Mae's rules, a second lienholder can be paid from the sale only if it releases its lien, releases you from the debt, and cancels what's owed on it. If it lets go of the lien but won't release you, it gets no payment from Fannie Mae (D2-3.3-01). With any second lender, ask in writing: are you forgiving what I owe, or only letting go of your claim on the house?

State limits on collecting after a foreclosure may not reach a short sale. Your state guide says whether lenders there can seek a deficiency after a foreclosure, and a local attorney can tell you whether that covers a short sale.

Short sale, deed in lieu or foreclosure?

All three end with you leaving the home. A deed in lieu Voluntarily giving your home to the lender to cancel the debt and avoid foreclosure. Simpler than foreclosure, but you still lose the house. Learn more → is when you voluntarily turn over ownership of your home to the lender to avoid foreclosure (CFPB). Foreclosure is when the lender takes action to collect the debt by selling your home, and the process differs by state (CFPB).

The Fannie Mae waits come from its Selling Guide, and can be shorter if you can document a hardship outside your control (B3-5.3-07). Waits for FHA, Freddie Mac, VA and USDA loans are in this table.

What does a short sale do to my credit?

It's reported. FHA's rules say a pre-foreclosure sale is reported to the credit bureaus and will likely affect your ability to get another mortgage and other credit (FHA handbook). Fannie Mae requires servicers to report short sales, deeds in lieu and foreclosures to the credit bureaus (Fannie Mae Servicing Guide C-4.1-01). On a direct loan from the U.S. Department of Agriculture (USDA), USDA may report debt settled this way to the Internal Revenue Service (IRS) and the credit bureaus (7 C.F.R. § 3550.211).

None of these sources puts a number of points on it. What it does to your score depends on the rest of your report.

Will I owe taxes on the forgiven debt?

You might. When a lender cancels part of what you owe, the IRS generally counts the taxable amount as ordinary income. The lender may send you a Form 1099-C showing the amount canceled and the date. You're responsible for reporting the right amount even if that form is wrong (IRS Topic 431).

The exclusion for the home you live in

A federal tax exclusion for mortgage debt on your main home now covers forgiven debt in only two cases: it was forgiven before January 1, 2026, or it was forgiven under an agreement entered into, and put in writing, before January 1, 2026 (26 U.S.C. § 108(a)(1)(E), IRS Topic 431). It applies to a mortgage you took out to buy, build or substantially improve your main home, secured by that home, on up to $750,000 of that debt, or $375,000 if you're married filing separately (IRS Publication 4681).

After that

Forgiven debt is generally income unless another exclusion applies. Two others:

• Insolvency. You can exclude forgiven debt to the extent you were insolvent, meaning you owed more than everything you owned was worth. It's measured right before the debt is forgiven (IRS Topic 431, 26 U.S.C. § 108(d)(3)).
• Bankruptcy. Debt canceled in a bankruptcy case under Title 11, the federal Bankruptcy Code, can be excluded (IRS Topic 431).

If you exclude forgiven debt, you report it on Form 982 and attach it to your tax return (IRS Topic 431).

A nonrecourse loan, one you weren't personally liable for, is treated differently. When the lender takes the property to settle a nonrecourse debt, the IRS treats it as a sale for the full amount of the debt, and you have no ordinary income from canceled debt (IRS Topic 431). That sale can still produce a taxable gain, and whether this applies to a short sale depends on your facts.

This is general information, not tax advice. A tax professional should look at your situation before you sign and before you file.

What should I ask before I sign?

Get the answers in writing, in the approval itself if you can:

1. Does this waive the leftover balance?
2. Do I have to put in cash of my own?
3. What happens to my second mortgage or home equity line, and does that lender release me from the debt?
4. When does the sale have to close?
5. How will this be reported to the credit bureaus?
6. Will I get a Form 1099-C for forgiven debt?

A HUD counselor A housing counselor approved by the U.S. Department of Housing and Urban Development. They provide free help with mortgage problems and can negotiate with your lender. can help you look at your finances, weigh your options and make a plan (CFPB). You can find one near you. A foreclosure attorney can read the approval before you sign it, and legal aid may do that for free.

Your state's rules

Your state guide covers foreclosure where you live, including whether lenders there can seek a deficiency after a foreclosure, with the law behind it.

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Colorado
• Connecticut
• Delaware
• District of Columbia
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• New Hampshire
• New Jersey
• New Mexico
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• Tennessee
• Texas
• Utah
• Vermont
• Virginia
• Washington
• West Virginia
• Wisconsin
• Wyoming

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