What Is a Short Sale?

When you can no longer afford your mortgage payments and owe more than your home is worth, your lender may allow you to make a short sale transaction. A short sale means selling  your home for less than what you still owe on your mortgage. You’ll need your lender’s approval to do a short sale, because they’ll be accepting less than they’re owed at closing.

The term “short sale” doesn’t mean the process is quick — quite the opposite, actually. It refers to the sale proceeds falling “short” of what you owe on your mortgage. Short sales are a common way for homeowners to avoid foreclosure to protect their credit from further damage and regain financial stability during a challenging time. 

If you're a buyer, a short sale can enable you to buy a property at a discount. Although, buying a property in a short sale may require patience as a short sale can take longer than a traditional home sale. Let's review more details about how short sales work for sellers and buyers.

Short sale vs foreclosure

While a short sale and foreclosure are not the same thing, one is often prompted by the other. A short sale is typically initiated by a homeowner to avoid foreclosure, because they can no longer make their mortgage payments. Foreclosure is the legal process initiated by the lender when the homeowner stops making payments. You can think of a short sale as a negotiated exit strategy when you’re facing an impossible financial situation. Instead of the bank foreclosing on the property, you’re taking control of the situation and working collaboratively with your lender to find a solution that works for everyone involved.

How does a short sale work?

The short sale process typically takes 3-6 months from start to finish, though timelines may vary from as little as 10 days to over a year for complex situations with multiple lienholders or complications. Sellers surveyed in 2024 reported a 50-50 split when it came to having at least 1 offer fall through.

Understanding each step of the short sale process can help sellers and buyers plan ahead and set realistic expectations for a smooth closing.

Short sale process for sellers

1. Assess your situation 

Consult with a short-sale real estate agent or housing counselor to understand your options fully. Lenders often won't consider a short sale approval for your property until you're two to three months behind on your payments. Your initial assessment should include a realistic evaluation of your financial situation, current home value, outstanding loan balance, and future earning prospects. You can check how much your home is worth on Zillow using our free Zestimate tool. 

2. Gather documentation 

When you owe more than your home will sell for, you can't just list your home to start. You first need to provide proof of hardship to your lender. The two most accepted hardship cases are proof that lower income has made your home unaffordable, or that you're subject to a mandatory job relocation. Missing or incomplete documentation is one of the primary reasons short sales get delayed or denied. To prepare for the conversation with your lender, gather documentation that verifies your income, debts and proof of hardship. These may include: 

• Bank statements
• Tax returns
• Income and expense reports
• A proof of hardship letter

3. Request lender approval 

When reviewing your hardship case, your lender will analyze your income and assets. If your debt-to-income ratio has risen, it will help your short sale approval. If you have money saved, lenders often require that you contribute these funds to minimize their loan payoff loss. You will also need to provide a market analysis as well as indicate any liens on your property.  

4. List the home for sale 

Once the lender has approved the short sale, you can list your property with a real estate agent. A short sale property is usually listed at or below market value to attract offers quickly. You’ll need to present any offers to the lender for approval. This process can take two weeks to several months. If you have a second mortgage, both lenders must approve each other's terms, making the process longer. 

5. Accept a buyer’s offer 

Once you receive an offer, make sure it reflects current market conditions and comes from a serious buyer, ideally someone who is pre-approved for financing or has proof of funds if paying in cash. This helps reduce the risk of delays or a failed sale. Be sure the purchase agreement includes a short sale contingency clause, which means the sale is subject to your lender’s approval. Without that approval, the sale can’t move forward.

6. Submit offer to lender 

The lender will review the buyer’s offer and decide if they will approve the sale. Lender approval may take 30-90 days (or longer).

7. Close the sale 

Once approved by the lenders, the short sale can close as soon as the buyer can get their loan approved, funded and closed. The sale proceeds and remaining debt is resolved or forgiven according to your agreement with the lender.

Short sale process for buyers

Here are the steps a buyer needs to take in order to purchase a property in a short sale:

1. Get pre-approved for a mortgage

Buying a short sale property begins the same way as buying any other home. Unless you’re making an all cash offer, you’ll need to get pre-approved for a mortgage. They will tell you how much you can afford, how much cash you need, and what your monthly costs will be. You can get pre-approved with us at Zillow Home Loans* with no impact on your credit score.

2. Shop for properties

If you find a short sale property that you want to purchase, work with a real estate agent to learn how much the seller owes, how many loans they have, and whether they've been approved by their lender(s) for a short sale. When you work with a Zillow partner agent, they’ll help you discover homes within your budget and negotiate deals to save you money.

3. Make an offer

Making an offer on a short sale works the same as making an offer on a traditional home for sale. The only difference is that a short sale may take more time to close on the home, so be patient. You’ll work with your agent to identify a fair market value based on recently sold comparable homes nearby and write your offer letter accordingly.

Does a short sale ruin your credit?

A short sale can drop your credit score by 75 to 200 points. Your lender will report the short sale to credit bureaus as either a “settled” debt or “paid” debt. A settled debt without any late mortgage payments during the short sale process could drop as little as 50 points. If you incur late payments during the short sale process, your score could drop as much as 200 points.

The short sale will stay on your credit report for seven years, but you can usually finance a new home purchase within one to seven years of the short sale depending on your credit score, loan type, down payment and circumstances that led to the short sale. The credit impacts of a short sale won’t cause as much of a swing on FHA mortgages. Many borrowers who complete a short sale may be eligible for a new FHA loan in as little as 12 months.

While a foreclosure can cause a similar initial dip in credit as a short sale, it may take three to seven years after a foreclosure to recover and qualify for a new mortgage.

What does a short sale mean for a buyer

For a buyer, a short sale often means purchasing a home at a discount with less competition. Sellers who are unable to repay the full mortgage amount will likely need to sell their house below the market value. The downside is that buying a short sale property usually adds an extra layer of complexity. Short sale purchases often lead to longer closing times, a more complex negotiation process due to the seller’s lender involvement, and an “as is” sale. As a buyer, you may not be able to negotiate repairs or price reductions based on property issues. Thankfully, unlike with foreclosures, short sale properties are often better maintained. Make sure you understand the potential risks before making an offer on a short sale property.

Why short sales take so long

When you’re facing a short sale, the process can drag on for months. The reason is that lenders are involved every step of the way. They have to approve the short sale, buyer offers, and the overall transaction. Here are common reasons why your short sale process may experience delays:

• Paperwork isn’t complete: If you’re missing bank statements, your hardship letter is vague, or your financial documents are outdated, this may cause delays. Your lender won’t move forward until they have every single piece of paper they need.
• Multiple loans on the home: Got a first mortgage, second mortgage, or home equity line of credit? Each lender has to approve the short sale separately. While one lender is ready to move forward, another might be dragging their feet.
• The lender is swamped: The department that handles short sales may be backed up with cases. 
• Investors have to sign off too: Some mortgages get sold to investment companies after you take out the loan. Your original lender might want to approve your short sale, but they have to get permission from these investors as well. More decision-makers means more time.

Experience matters tremendously in short sales and that’s why you want to work with a real estate agent who has closed short sales before. An experienced agent knows what documentation lenders want, how to communicate effectively with loss mitigation departments, and ways to avoid common pitfalls.

Be prepared to follow up regularly with your lender or servicer. Stay actively engaged in the process. Regular communication helps ensure your file doesn’t get lost in the shuffle and demonstrates your commitment to completing the transaction.

Pros and cons of a short sale

Short sales can provide an exit strategy for struggling homeowners, but they come with trade-offs. Like any major financial decision, short sales involve weighing immediate relief against long-term consequences.

Pros of a short sale

• Avoid foreclosure: You could minimize long-term damage and retain more control over the process rather than waiting for the lender to take action against you.
• May reduce remaining debt: Some lenders forgive the difference between your loan balance and the sale price, though this isn’t guaranteed and may have tax implications.
• You may qualify for a mortgage sooner: Compared to foreclosure, short sales typically allow you to qualify for new financing in less time.
• Protect your privacy: Short sales are less public than foreclosure proceedings, which become part of public records and may be reported in local media.
• Maintain some control: You remain actively involved in pricing, marketing, and selling your home.

Cons of a short sale

• Impacts your credit: Though less than a foreclosure, your credit score may drop, which can affect your ability to get new credit, rent apartments, or sometimes even find employment.
• The lender must approve everything: You can’t close without your lender’s sign-off, which means you have limited control over the final outcome despite your efforts.
• Time-consuming and uncertain: The process can take months with no guarantee of approval, leaving you in limbo and unable to move forward with other plans.
• Possible tax consequences: Forgiven debt may be taxed as income, potentially creating a significant tax bill when you’re already financially struggling.
• No proceeds from the sale: Unlike a traditional sale, you won’t receive any money from the transaction, and you may be required to bring money to closing.

A short sale isn’t always the best solution. If you have enough equity for a traditional sale, the ability to catch up on payments, or access to assistance programs, consider exploring these alternative options first. A Zillow partner agent can help assess your unique situation and guide you through alternative selling options.

Remember, a short sale is a significant financial decision with long-term implications. Take time to understand your options fully, gather input from qualified professionals, and make the choice that best serves your long-term interests.

*An equal housing lender. NMLS #10287