How does a short sale work?

A short sale happens when a borrower sells their property for less than what is owed on the mortgage. In order to be eligible for a short sale the homeowner must be able to demonstrate a financial hardship that is causing the mortgage to be unaffordable.

For example, if your outstanding mortgage debt is $300,000 and the property is now only worth $150,000, this mortgage is considered to be "underwater." If you are looking to sell your property for less than your outstanding balance, you will have to supply all of your financial information to your lender so they can determine whether or not they want to sign off and settle the debt for less than the amount owed.

Please keep in mind that the servicer of the loan will be in control of the sale at all times. Even if you have a offer on the table ready to go, your application must be completely processed before they will accept the deal. In many cases the buyer will drop out because of how long this process can take. The realtor on the transaction (or yourself) are required to submit a written purchase agreement with estimated closing costs (estimated HUD) to the mortgage servicer.

Obviously a short sale is not the best solution for a homeowner or the lender. No one wants to have to sell their home for less than what they owe, especially those who have been working hard for years to build up equity. However, this option is much better than allowing the property to go into foreclosure. A foreclosure will completely destroy your credit rating and will remain on your credit property for up to seven years. For most people a foreclosure will make financing extremely difficult for years to come.

How will this affect your credit?

One of the main disadvantages of a short sale is the damage it will do to the seller's credit score. Not only will this negative mark remain on your credit report for a few years, but a short sale may lead to higher interest rates on future purchases or make financing anything else very difficult for years to come.

When you sell your home as a short sale, it seems your credit will be damaged approximately 60-150 points, especially if you were delinquent on your mortgage prior to closing. Unlike a foreclosure, the short sale will not remain on your report even close to 7 years and if you work on rebuilding your credit after the sale goes through, it could be as if the short sale never even took place.

However, for those who are able to short sale their property without missing a payment, the damages of this event will lessen a significant amount. Here on we have seen quite a few homeowners over the years achieve a short sale while current and their credit rating only dropped about 25-75 points.

Can you obtain a new mortgage after a short sale?

Fannie Mae allows new financing for a home loan after twenty four months from the date of closing. However, the qualifications when getting a new mortgage will be more strict. For example, to get a new mortgage within two years you must be able to provide a 20% down payment for the home you are trying to purchase. If you can only manage a 10% down payment, the waiting period to purchase can be up to four years. But for those who can demonstrate the sale was due to “extenuating circumstances” such as a divorce, health problems, job loss, etc, then Fannie Mae will allow financing immediately after the two year waiting period is up.

For sellers who were able to maintain their mortgage payment until the time of sale, have a decent debt to income ratio, and a excellent credit score, borrowers may qualify for a new home loan right away.

You will want to make sure you manage your credit wisely over the next few years as your slowly rebuild your credit wisely. Open a couple small credit accounts where you maintain about 40% balance and pay on time monthly. In addition, you do not want to make an emotional decision when you decide to buy more real estate. You need to get educated and make sure that you do not get into another bad investment that had just caused you to short sale because in the real world, it is not always a good time to buy a home and sometimes it is better to just rent.

Also, after a short sale it can be quite difficult trying to secure another mortgage.  Because you had to short sell your current property you will be seen as a high risk candidate for any future loans you seek as long as that short sale mark is on your credit report.

It would be very wise to first go out and consult with a couple real estate lawyers in your state to determine whether or not a short sale is right for you. The lawyer can also help explain all of the consequences that come along with this event and the specific laws in your state.

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Moe Bedard
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My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications. I currently live in Carlsbad, California with my beautiful wife and children.
  • Nadine Leonard

    Can I purchase a home before doing a short-sale on my existing home? We could put 50% or more down on an inexpensive home. Our current mortgage is $395,000 and even though the house appraised at $515,000 2 yrs ago it is probably worth $300,000 at best now. My husband needs to retire, he is 71. We want to purchase a home for $175,000 which we can afford on retirement. Is a short sale our best bet? And can we purchase and move before trying the short sale?

  • Moe Bedard


    The only way you could do this is if your new mortgage is for investment property or your lease out your current home and then buy the new home as your primary residence. Once the sale is final you can try to short sale, but it is highly unlikely because you do not have a hardship based on what you stated in this comment. Hence, a short sale will most likely never happen and if you do walk on the home, they can place a lien on your new home for the deficiency.

    I hop this helps!

  • HomeAdvisor

    Thank you Mr. Bedard for your article on Short Sales. I agree with your numbers on how the process will affect your credit score, although this will depend on what other problems you may be having leading up to the short sale.

    Like you said the short sale should only be used in the event that there is no other way of salvaging the mortgage. If in foreclosure there are many programs and modifications that can used to satisfy the lender and make it so the homeowner can afford the mortgage.

    I don’t agree that a lawyer is the best adviser for any situation dealing with mortgage problems. Lawyers are not experts in loan modifications.

    With the Leonard case I would advise you to go to my site at and fill out the form to get a free consultation from one of our financial analysts!

  • Monica


    Just curious if it would look bad to rent a small house while our current home is being prepared to short sale. Our current mortgage is $1500/mth and the new, smaller home to rent is only $950/mth. Would that hurt our chances of short sale? We can’t afford the $1500 a month anymore but didn’t know if we should just stay put until possibly short sale.


  • Grace

    Very good advice and information.

  • Jacky Robertson

    We are home owners of two homes. One worth about $100K that we live in and another worth $120K that we rent out. Our payment on the 2nd house is almost $2k and it is killing us financially. We are not Americans but we are here legally. My spouse says we will need to pay the balance on the short sale but I say we will not need to. Currently our earned income does not cover expenses and we are killing our kids college fund. Will we have issues with a short sale as we are not Americans? Is my spouse correct about the balance due? Exactly WHAT is considered hardships? thanks

  • Jodi

    I am looking at a short sale on a condo. There is no mortgage. There is a lien from the home owners assoc. for unpaid fees. How does that work? If your offer is accepted is there a certain amount of time to pay in full with a down payment? Or do you have to have all monies up front. Additionally, can you set possession for 90 days and have all monies by then?