Short Sale
Definition and meaning of Short Sale in real estate.
A short sale is the sale of a property for less than the balance owed on its mortgage, which can only proceed if the lender agrees to accept the reduced amount as settlement of the debt.
In more detail
A short sale arises when a homeowner owes more than the property is worth and needs to sell. Because the sale price will not repay the loan, the lender must approve both the sale and the shortfall, which makes the timeline considerably longer and less predictable than an ordinary sale.
A short sale is not a foreclosure: the owner still sells the property voluntarily and the lender does not take possession. Whether the unpaid balance, called the deficiency, is forgiven or still owed depends on the agreement with the lender and on state law, and forgiven debt can carry tax consequences.
Key facts
| Category | Buying & Selling |
|---|---|
| Requires | Lender approval of both the buyer's price and the shortfall |
| Not the same as | Foreclosure — in a short sale the owner sells voluntarily and retains possession until closing |
| Key variable | Whether the deficiency is forgiven or pursued, which varies by agreement and by state |
An owner owes $260,000 on a mortgage but the property appraises at $225,000. The lender agrees to release its lien in exchange for the $225,000 sale proceeds, allowing the sale to close.
Frequently asked questions
How is a short sale different from a foreclosure?
In a short sale the owner sells the property voluntarily with the lender's consent. In a foreclosure the lender takes legal action to seize and sell the property. Both involve a loan that cannot be repaid in full, but the process, timeline, and control differ.
Why do short sales take longer to close?
An ordinary sale needs agreement between buyer and seller. A short sale also needs the lender, and sometimes a mortgage insurer or a second lienholder, to review and approve the shortfall. Each additional approval adds time.
What happens to the unpaid balance in a short sale?
It is called a deficiency. Depending on the written agreement with the lender and on state law, it may be forgiven or the borrower may remain liable for it. Forgiven mortgage debt can also be treated as taxable income in some circumstances.
Related terms
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