A short sale is the sale of property for less than the outstanding loan obligations on the property. By short selling, the homeowner can avoid foreclosure. A short sale allows the homeowner to sell their property for the current market value. Short selling can offer a homeowner financial relief during a hardship such as a divorce, job transfer, job loss, or any other major life event that may leave the homeowner unable to maintain mortgage payments. A short sale may affect the homeowner’s credit while also restricting the ability to buy another home. Either way, having a short sale on your record is better than a foreclosure.


A short sale is a method used when a homeowner must sell the home and owes more than what is being received in the sale, and does not have the liquid cash to make up the difference. The amount the home will be sold for is based on the market value during the time of sale. To list the home as a short sale, the lender must approve the short sale while also agreeing to accept the lower amount as the full and final payment on the loan. The lender will face a loss by agreeing to the short sale but may agree if it is believed to be a better option than foreclosure. 

Having a home value that is lower than your mortgage balance does not automatically qualify a homeowner for a short sale. A short sale may not be approved if: 

  1. The market price exceeds the loan balance. 
  2. Documentation proving financial hardship is not submitted.  
  3. The homeowner can get a loan modification or refinance the loan. 

Exploring other options will save the homeowner time and protect the homeowner from unnecessary damage to their credit score.


A short sale is usually only an option when the outstanding mortgage balance exceeds the home’s market value. An advantage of short selling over a home foreclosure is that you can obtain a home loan sooner. After foreclosure, the waiting period to be able to purchase a new home is seven years. After a short sale, the waiting period for buying a new home is only four years. 

There are several risks in opting for a short sale.

  • A short sale may take longer. 
  • The lender may initiate the foreclosure process before the short sale can be completed. 
  • The debt forgiven in a short sale, which is the difference between the sale price and the amount owed on the mortgage, will be reported to the IRS and may be taxed as income.

The IRS does offer exclusions for forgiven debt on primary residences and home equity loans taken out for upgrading the property, but not for second homes or home equity lines of credit. If the homeowner can prove insolvency, there may be a way of avoiding the taxes on the forgiven debt from a second home or home equity line of credit. The best thing to do is for the homeowner to speak with a tax advisor if they are worried about the tax consequences.  It would be best if you work with a person knowledgeable in the short sale process, so you get the best advice possible.


A short sale is not an option that homeowners want to face since it will still affect credit scores negatively. Below are a few strategies to avoid having to face a short sale:

  • Explore alternative payment solutions with the lender, including loan modification or refinancing. 
  • Look for other ways to obtain extra income to keep up with the loan payments when falling behind. 
  • Consider whether it is possible to continue making payments until the value of the home rises and can be sold for an amount that will satisfy the outstanding loan. 

Debt Rescue Law is a trusted partner for many borrowers and can provide more information about the short sale process. Give us a call at (833) 707-1234 today for a FREE consultation.

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