- Best for
- When you cannot afford the home even with a modification and owe more than it is worth.
- You keep the home
- No. You leave, but on a timeline you help set.
- Watch for
- Whether the leftover debt is waived in writing, and tax on forgiven debt.
First: do you owe more than the home is worth?
If the home is worth more than you owe, you do not need a short sale. An ordinary sale before the foreclosure date pays off the loan and leaves the remaining equity with you. Ask your servicer for a payoff statement so you know the exact number.
A short sale is for the opposite case: the sale price will not cover the loan, and the lender has to agree to accept less.
How a short sale works
- You apply to your servicer for a short sale, with proof of your hardship and finances.
- You list the home with a licensed real estate agent. The servicer must approve the price and the final offer.
- At closing the lender takes the sale proceeds and releases its lien.
- You move out by the closing date.
What happens to the rest of the debt
This is the most important thing to get in writing. Whether you can be pursued for the unpaid balance depends on your loan and your state.
- Fannie Mae loans: the borrower is released from any deficiency on loans without mortgage insurance, or where the insurer has given Fannie Mae authority. There is a $7,500 relocation incentive when the home was your principal residence and you are not asked to contribute cash.
- FHA loans: in a pre-foreclosure sale, the lienholders release their liens and forgive the deficiency.
- Freddie Mac loans: a short sale may come with a relocation incentive.
- VA loans: a short sale (VA calls it a compromise sale) is on VA's list. You must repay VA's loss to restore your entitlement for a future VA loan.
- Any loan: read the approval letter. It should say the debt is satisfied in full. If it does not, ask. Your state's page explains its deficiency rules.
Tax and credit
Forgiven mortgage debt can be taxable income. The exclusion for a main home expired for debt discharged in 2026 unless a written arrangement existed before January 1, 2026, though the insolvency exclusion remains. See taxes after foreclosure or forgiven debt.
How much time do you have? It depends on your state.
See the foreclosure timeline, deadlines and free local help for the state where the home is.
Common questions
Do I pay the real estate agent in a short sale?
The agent's commission is normally paid from the sale proceeds, which the lender approves. You should not be asked to pay an upfront fee to anyone to arrange a short sale.
Can a short sale stop a foreclosure sale that is already scheduled?
It can, if the servicer agrees to postpone the sale while an approved offer closes. A complete application sent more than 37 days before the sale triggers federal review protections. Later than that, a postponement is at the servicer's discretion.
Other options to compare
- Repayment planYou keep paying your normal mortgage payment and add an extra amount each month until the missed payments are paid back.
- ForbearanceYour servicer agrees to accept reduced payments, or none, for a limited time. The missed amount is still owed and has to be dealt with when the pause ends.
- Payment deferral or partial claimThe missed payments are set aside as a balance with no interest and no monthly payment. It comes due when you sell, refinance or pay off the mortgage.
- Loan modificationYour servicer permanently changes the loan, usually by adding the missed payments to the balance and stretching the term or lowering the rate, so the payment is affordable.
- ReinstatementYou pay all the missed payments, late fees and foreclosure costs in one payment. The loan goes back to normal and the foreclosure ends.
- Deed in lieu of foreclosureYou sign the home over to the lender and the lender cancels the foreclosure. It is usually considered after a short sale has not worked or is not practical.
Sources
- Fannie Mae Servicing Guide D2-3.3-01, short sale
- HUD Handbook 4000.1, Update 18 (August 2026), FHA loss mitigation
- Freddie Mac: Options to leave your home
- VA: Help to avoid foreclosure
- 7 C.F.R. § 3555.305, USDA voluntary liquidation (eCFR)
- IRS Publication 4681, canceled debts, foreclosures, repossessions and abandonments
- 12 C.F.R. § 1024.41, loss mitigation procedures (eCFR)