A short sale happens when a homeowner sells a house for less than the amount needed to pay off the mortgage and the mortgage servicer or lender agrees to the transaction.
Here’s a simple example.
Suppose you owe $350,000 on your mortgage, but your home is worth only $320,000.
If normal selling expenses also have to be paid from the proceeds, there may not be enough money at closing to completely pay off the mortgage.
In a normal sale, that shortage would generally prevent the mortgage lien from being released unless the homeowner brought enough money to closing to cover it.
In a short sale, the homeowner asks the mortgage company to approve the sale despite the shortage.
The Consumer Financial Protection Bureau (CFPB) describes a short sale as a type of “loss mitigation”—in plain English, one of the options a mortgage servicer may consider as an alternative to foreclosure.
The important part is this:
You don’t get to decide by yourself that the bank will accept less than it’s owed.
The required parties have to approve the short sale.
That’s one of the biggest differences between a short sale and a traditional home sale.
How a Short Sale Works
The basic process usually looks something like this:
- Determine approximately what the home is worth.
- Determine how much is owed against the property.
- Talk with the mortgage servicer about available options.
- Request information about its short-sale or loss-mitigation process.
- Provide the financial information and documents the servicer requires.
- Market the property and find a buyer.
- Submit the proposed transaction for required approval.
- Resolve any additional liens or mortgages.
- Review the written approval terms carefully.
- Close the sale if everyone required to approve it agrees.
The exact process depends on the mortgage, servicer, investor, liens against the property, and homeowner’s circumstances.
CFPB guidance notes that completing a short sale requires mortgage-servicer approval. When there are other mortgages on the property, approval from those mortgage servicers may also be necessary.
That extra approval process is why a short sale can be more complicated than an ordinary real estate transaction.
Why Would a Lender Agree to a Short Sale?
This is a reasonable question.
Why would a mortgage company voluntarily accept a sale when there isn’t enough money to pay everything owed?
Because the alternative may be foreclosure.
Foreclosure can involve additional time, expenses, property maintenance, legal processes, and uncertainty.
In some circumstances, approving a reasonable short sale may make more financial sense for the parties involved than completing a foreclosure.
That doesn’t mean a lender will automatically approve one.
The homeowner generally needs to qualify under the applicable requirements, and the proposed transaction must be acceptable to the parties whose approval is required.
Do You Have to Be Behind on Your Mortgage to Do a Short Sale?
Not necessarily in every situation.
The requirements depend on your loan and the program available through your mortgage servicer or investor.
This is an important distinction because homeowners sometimes assume they should intentionally stop making mortgage payments to qualify for help.
Don’t intentionally miss mortgage payments based on something you’ve heard online or from another homeowner.
Before making that kind of decision, contact your mortgage servicer and find out what actually applies to your loan.
The CFPB recommends contacting your servicer promptly if you’re having trouble making mortgage payments or believe you’re going to have trouble.
A Short Sale Isn’t the Same as Selling at a Loss
This causes a lot of confusion.
You can sell a house for less than you originally paid and still not have a short sale.
For example:
You bought your home for $400,000.
Years later, you sell it for $375,000.
But you only owe $250,000 on your mortgage.
That’s not a short sale.
There is enough money from the transaction to satisfy the mortgage.
A short sale is about the relationship between the amount available from the sale and the debt and obligations that need to be addressed at closing—not simply whether you made or lost money compared with your original purchase price.
What Does “Underwater” Mean?
An underwater mortgage generally means you owe more on the mortgage than the home is worth.
For example:
| Home Value | Mortgage Balance | Approximate Position |
| $400,000 | $300,000 | $100,000 above mortgage balance |
| $400,000 | $400,000 | Roughly even before selling costs |
| $400,000 | $425,000 | $25,000 underwater |
Selling costs matter too.
A homeowner can technically owe less than the home’s market value and still discover that there isn’t enough money to complete a normal sale after all of the transaction’s obligations and costs are considered.
That’s why I prefer to look at an estimated net sheet rather than simply comparing the home’s estimated value with the mortgage balance.
A net sheet estimates what will actually be left after the anticipated costs of selling the property.
Does the Bank Automatically Forgive the Remaining Mortgage Debt?
Don’t assume that it does.
This is one of the most important issues to understand before agreeing to a short sale.
The difference between what’s owed and what the lender receives is commonly called a deficiency.
For example:
- Mortgage amount owed: $350,000
- Amount lender receives from transaction: $310,000
- Difference: $40,000
That doesn’t automatically tell us what will happen to the $40,000.
The Minnesota Attorney General warns that a lender may still hold a seller responsible for a deficiency after a short sale. A second mortgage can create another deficiency issue as well.
The CFPB similarly recommends asking the lender to waive a deficiency where the homeowner could otherwise remain responsible for it—and getting any waiver in writing.
This is an area where the exact documents matter.
Don’t rely on a verbal statement such as:
“They told me I’m good.”
You want to understand what the written short-sale approval says about the remaining debt.
If you’re unsure about your legal obligations, have an appropriate Minnesota attorney review the documents.
What If There’s a Second Mortgage or HELOC?
This can make the transaction more complicated.
Imagine that you have:
- First mortgage: $300,000
- Home equity line of credit: $50,000
- Home value: $325,000
The first mortgage isn’t the only issue.
The HELOC lender has a lien against the property too.
That lien generally needs to be addressed before the buyer can receive the title contemplated by the transaction.
The Minnesota Attorney General specifically warns homeowners that a second mortgage can create its own potential deficiency after a short sale.
Other liens can complicate things as well.
That’s why one of the first things I want to understand when looking at a possible short sale is everything attached to the property, not just the first mortgage.
Short Sale vs. Foreclosure
They’re not the same thing.
| Short Sale | Foreclosure |
| Homeowner sells the property | Lender uses the foreclosure process |
| Requires approval from necessary parties | Governed by the applicable foreclosure process |
| Home is marketed to find a buyer | Property may ultimately be sold through foreclosure |
| Homeowner participates in the sale | Homeowner has less control over disposition |
| Deficiency needs to be carefully addressed | Debt consequences depend on the loan and circumstances |
| May avoid completion of foreclosure | Foreclosure proceeds through its statutory process |
A short sale can be an alternative to foreclosure, but that doesn’t automatically make it the best choice.
Sometimes there are better options.
Should You Consider a Loan Modification Before a Short Sale?
If your goal is to keep your home, I would absolutely want to understand the home-retention options before deciding to sell.
Depending on your loan and circumstances, possibilities might include:
- loan modification
- repayment plan
- forbearance
- refinance
- other available loss-mitigation programs
A loan modification changes certain terms of the mortgage in an attempt to make the loan workable.
A forbearance generally allows payments to be temporarily reduced or paused under an agreement with the servicer.
A repayment plan can provide a structured way to catch up on missed payments.
These options aren’t available or appropriate for everyone.
But selling the house is a major decision. If keeping the home is important to you, it makes sense to understand whether keeping it is realistically possible before committing to a sale.
The CFPB lists modifications, repayment plans, forbearance, short sales, and deeds-in-lieu among potential mortgage-assistance options.
Short Sale vs. Regular Sale
Before assuming you need a short sale, find out whether you actually do.
I’ve been involved in more than 2,000 residential real estate transactions over more than 20 years in Minnesota, including hundreds of foreclosure-related transactions.
One lesson I’ve learned is that homeowners sometimes make decisions based on numbers that aren’t complete.
They may know roughly what they owe.
They may have looked at an online home-value estimate.
Then they conclude:
“I’m underwater.”
Maybe.
But we need better information before reaching that conclusion.
I’d want to know:
- What is the house realistically worth today?
- What is the current mortgage payoff?
- Are there second mortgages or HELOCs?
- Are there other liens?
- What would the expected selling expenses be?
- Is a normal sale possible?
- How much time do we have?
You may discover that you have more equity than you thought.
Or you may discover that a short sale really is something worth exploring.
Either way, the first step should be getting accurate numbers.
Can You Do a Short Sale After Foreclosure Has Started?
Potentially, but timing matters.
Starting a short sale doesn’t mean you should assume every foreclosure deadline automatically stops.
Minnesota foreclosure involves specific stages and deadlines. The Minnesota Attorney General describes the process as including default, the sheriff’s sale, and a redemption period.
Federal mortgage-servicing rules can also affect how loss-mitigation applications and foreclosure interact.
If foreclosure has already started, don’t guess about your timeline.
Find out:
- whether a sheriff’s sale has been scheduled
- the scheduled date
- what notices you’ve received
- whether you’ve submitted a complete loss-mitigation application
- what your servicer says about the status of the foreclosure
- what deadlines apply to your situation
If a sheriff’s sale is approaching, getting qualified legal advice may also be appropriate.
Minnesota foreclosure law and federal servicing rules can change, and individual circumstances vary. This article is educational information, not legal advice.
How Long Does a Short Sale Take?
There isn’t one reliable timeline.
Short sales usually involve more moving parts than traditional sales because approval is required from parties that normally wouldn’t control the seller’s decision to accept an offer.
The process may involve:
- financial-document review
- property valuation
- buyer-offer review
- investor approval
- mortgage-insurance requirements
- second-lien negotiations
- title issues
- requests for updated documents
The Minnesota Attorney General cautions that lenders can take months to evaluate short-sale requests.
The practical lesson is simple:
If a short sale may be necessary, don’t wait until the last possible moment to investigate it.
Will a Short Sale Hurt Your Credit?
A short sale can affect your credit.
The exact effect depends on your overall credit history, how the mortgage is reported, whether payments were missed, and other circumstances.
I wouldn’t make a major housing decision based on a generic statement like:
“A short sale lowers your score by exactly ___ points.”
Credit scoring doesn’t work that simply.
HUD guidance for FHA pre-foreclosure sales specifically notes that these transactions are reported to consumer reporting agencies and are likely to affect the borrower’s ability to obtain credit.
If future financing is important to you, talk with a knowledgeable mortgage professional about how your particular situation could affect your ability to qualify for another home loan.
Could a Short Sale Have Tax Consequences?
Potentially.
When mortgage debt is forgiven, tax questions can arise.
The Minnesota Attorney General specifically advises homeowners considering a short sale that there may be income-tax consequences and suggests consulting a tax advisor.
Tax laws and exceptions change.
Don’t rely on an old article, a neighbor’s experience, or what happened with someone else’s short sale.
Ask a qualified tax professional how the current rules apply to your specific situation.
Do You Get Any Money From a Short Sale?
Don’t assume you’ll receive money from the sale.
Remember why it’s called a short sale: there isn’t enough money in the transaction to satisfy everything in the normal way.
However, certain mortgage programs or arrangements may provide approved relocation assistance in qualifying circumstances. CFPB and HUD materials note that relocation assistance may sometimes be available.
Whether that’s available depends on your specific loan and program.
Ask your servicer.
Common Short-Sale Mistakes
Waiting too long
Homeowners sometimes spend months hoping the situation will somehow fix itself.
Waiting can reduce your options.
You don’t necessarily need to sell because you’re one payment behind—or even because you’ve received foreclosure notices.
But you do need to understand your timeline.
Assuming an online estimate proves you’re underwater
Online estimates can be useful starting points.
They aren’t the same thing as determining a realistic sale price and estimated net proceeds.
Ignoring a second mortgage
A second mortgage, HELOC, or other lien doesn’t disappear just because the first mortgage approves a short sale.
Assuming the remaining balance is forgiven
Get the terms in writing.
This is too important for assumptions.
Stopping mortgage payments because someone told you to
Your neighbor’s short sale isn’t your short sale.
Ask your mortgage servicer what applies to your loan before making decisions about payments.
Assuming a short sale is automatically better than every other option
Sometimes keeping the home is possible.
Sometimes a traditional sale works.
Sometimes a short sale makes sense.
Sometimes another foreclosure alternative deserves consideration.
The right answer depends on the numbers and the homeowner’s goals.
A Simple Short-Sale Decision Tree
Do you want to keep the home?
Yes → Contact your mortgage servicer and investigate available home-retention options first.
No → Determine the home’s realistic market value and estimated net proceeds.
Enough money to pay the mortgage and transaction obligations?
Yes → You may be able to complete a traditional sale.
No → Determine whether a short sale may be necessary.
More than one mortgage or other liens?
Yes → Identify every lien and determine what approvals will be required.
Foreclosure already started?
Yes → Verify the foreclosure timeline immediately. Don’t assume applying for a short sale automatically stops the process.
This isn’t a substitute for professional legal, financial, tax, or mortgage advice. It’s simply a useful way to organize the questions.
What I Would Do First
If someone sat down with me at their kitchen table and said:
“Kyle, I think I need to do a short sale. What should I do?”
I wouldn’t start by telling them to list the house.
I’d start with the numbers.
I’d want to determine:
- What is the house realistically worth?
- How much is owed?
- What other liens exist?
- What would a traditional sale likely net?
- Is the homeowner behind on payments?
- Has foreclosure started?
- What does the homeowner actually want to accomplish?
- Have they explored options that might allow them to keep the house?
Only then would I start talking seriously about whether a short sale makes sense.
After more than 20 years in Minnesota real estate and hundreds of foreclosure-related transactions, I’ve learned that homeowners need clarity before they need a sales pitch.
Sometimes the best outcome is selling.
Sometimes it isn’t.
Frequently Asked Questions About Short Sales
What is a short sale in simple terms?
A short sale is a home sale where the proceeds aren’t enough to fully satisfy the mortgage obligations and the required mortgage parties agree to allow the transaction to close.
Is a short sale the same as foreclosure?
No. In a short sale, the homeowner sells the property with required approvals. Foreclosure is the legal process a lender uses to enforce its rights after mortgage default.
Does a short sale mean the bank owns my house?
No. A short sale generally occurs while the homeowner still owns the property and is attempting to sell it.
Can a lender reject a short sale?
Yes. A homeowner doesn’t have unilateral authority to require a mortgage lender or servicer to accept less than what’s owed.
Can I short sell if I have a second mortgage?
Potentially, but the second mortgage or HELOC generally needs to be addressed as part of the transaction.
Will I owe money after a short sale?
Possibly. Never assume the remaining balance has been forgiven. Review the written approval carefully and get appropriate legal advice if you’re uncertain about your continuing liability.
Can I short sell my Minnesota home after foreclosure starts?
It may be possible, depending on timing and the parties involved. If foreclosure has started, verify your deadlines immediately rather than assuming the short-sale process stops them.
Is a short sale always better than foreclosure?
No. It can be a useful foreclosure alternative, but every homeowner’s financial situation, loan, equity position, goals, and timeline are different.
Should I contact my lender before trying a short sale?
Yes. The Minnesota Attorney General recommends contacting your lender regarding its short-sale application and qualification process.
Where can I get independent foreclosure help?
A HUD-approved housing counselor can help homeowners understand mortgage-assistance and foreclosure-avoidance options. The CFPB recommends HUD-approved housing counseling and notes that this assistance is available at little or no cost.
The Bottom Line
A short sale is a way to sell a home when the sale won’t generate enough money to fully satisfy the mortgage and the required parties agree to let the transaction proceed.
But knowing the definition is the easy part.
The important questions are:
- Do you actually need a short sale?
- How much is your home worth?
- Exactly how much do you owe?
- Are there other liens?
- Can you keep the home if you want to?
- What happens to any remaining debt?
- Has foreclosure started?
- How much time do you have?
- Are there tax consequences?
- What does the written approval actually require?
Get those answers before making the decision.
Need Help Understanding Your Options?
Every homeowner’s situation is different.
The amount you owe, the type of loan, your equity, and where you are in the foreclosure process all affect your options.
If you’d like to talk through your situation, Kyle White is happy to spend 20-30 minutes helping you understand the pros and cons of every option available.
Sometimes selling is the best decision.
Sometimes it isn’t.
The goal is simply to help you make the best decision for your family.
There is no pressure and no obligation.
