How Does a Short Sale Work?
A short sale means selling your home for less than you owe on the mortgage, with your mortgage company's approval. You find a buyer, the company approves the price, and the sale can settle the loan even though it comes up short. You still move out. Before you sign, get in writing whether you'll owe the rest.
How does a short sale work?
A A sale of a home for less than the mortgage balance, with the lender’s approval. Learn more → is a sale of your home for less than what you owe on your mortgage. If your lender or servicer agrees, the sale can pay off your mortgage even when the price falls short of the balance. Because it's a sale, you'll have to leave your home Source CFPB.
Your mortgage company, the company you send your payment to (your paperwork may call it your The company that collects your monthly mortgage payments. This may not be the same company that originally gave you the loan. Learn more → ), has to approve the deal. You find the buyer. The steps usually run like this:
- Ask your servicer to review you for a short sale. Expect to send papers on your income and your hardship.
- List the home and accept an offer that depends on the lender's approval.
- Send the offer to your servicer. For a Fannie Mae loan, the servicer has to answer in writing within 30 calendar days of getting the first offer and, if it needs one, your complete application Source Fannie Mae D2-3.3-01.
- Read the approval before you sign. Look for what it says about the leftover balance.
- Close and move out. A Fannie Mae short sale has to close within 60 calendar days of the servicer's approval, unless Fannie Mae agrees in writing to more time Source Fannie Mae D2-3.3-01.
Can I do a short sale with my loan?
It depends on who owns or backs your loan, and that isn't always your mortgage company. Your mortgage company can tell you. Each program's rules on what comes before a short sale are on what your loan type's rules say about getting help.
| Your loan | Who can get one | Good to know |
|---|---|---|
| Fannie Mae | If you're current or less than 90 days behind, the servicer reviews you based on a complete application, the papers on your finances and hardship. If you're current or less than 60 days behind, it also has to find you're in imminent default: a hardship will keep you from making your payments soon. More than 18 months behind, it can review you without a complete application. | The servicer checks whether you'll have to put in cash of your own. Source Fannie Mae D2-3.3-01 |
| Freddie Mac | Freddie Mac defines a standard short sale as selling the home for less than it takes to pay off the mortgage. | Servicers can approve some on their own, within limits Freddie Mac sets, and the rest go to Freddie Mac for review. Its public summary doesn't list the detailed rules, so ask your servicer. Source Freddie Mac |
| FHA | FHA calls it a pre-foreclosure sale. You have to be at least 61 days behind when the servicer approves you, and you have to have used up, or not qualified for, FHA's permanent options to keep the home. | Open whether or not you live in the home. HUD doesn't require proof of hardship, but you have to say you have one that affects your ability to keep up the mortgage. A streamlined version for servicemembers can be offered when permanent change-of-station orders require a move to a new duty station at least 50 miles away. Source HUD Handbook 4000.1 |
| VA | If your servicer agrees, it accepts the total proceeds from the sale as full payment, even if that's less than you owe. | It could cost you some or all of your future VA home loan benefit. To restore it, you'd need to pay back what VA lost on your loan. Source VA |
| USDA guaranteed | You need to be at least 30 days behind or in imminent default, among other conditions, and the lender has to try its options to catch you up first. | The price has to reflect the home's fair market value. Source 7 C.F.R. § 3555.305 |
| USDA direct | You can sell for at least the value USDA works out, called net recovery value, and put the money toward the loan. | A direct loan is made by USDA itself. Source 7 C.F.R. § 3550.211 |
| Other loans | Loans a bank keeps for itself, and private loans, follow the lender's own rules. | Ask your servicer what it offers. |
FHA is the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development (HUD). VA is the Department of Veterans Affairs, and USDA is the U.S. Department of Agriculture.
Will I still owe the rest after a short sale?
Maybe. The gap between the sale price and what you owe is the leftover balance, also called the deficiency. In some states, a lender can sue you for it after a short sale, and a court order to pay it is a A court judgment for an unpaid mortgage balance left after a foreclosure sale. Learn more → . A deficiency waiver means the lender gives up its right to collect it. If you get one, get it in writing and keep it Source CFPB.
What happens to it depends on your loan:
- Fannie Mae: on a loan with no mortgage insurance, the servicer must release you from the leftover balance once the short sale is done, and it must give you a waiver at closing when one applies. With mortgage insurance, it can depend on the insurer Source Fannie Mae D2-3.3-01.
- FHA: a pre-foreclosure sale is, by definition, one where the lienholders forgive the leftover balance Source HUD Handbook 4000.1.
- VA: the servicer accepts the sale proceeds as full payment. Getting your full VA home loan benefit back is separate, and means repaying what VA lost Source VA.
- USDA direct: USDA may go after the leftover balance unless you had a payment moratorium at some point during the loan and tried in good faith to repay it Source 7 C.F.R. § 3550.211.
- Freddie Mac, USDA guaranteed and other loans: it comes down to what the lender puts in writing.
What happens to a second mortgage in a short sale?
A second mortgage or home equity line has to be dealt with too. Under Fannie Mae's rules, a second lender can be paid from the sale only if it releases its lien, releases you from the debt, and cancels what's owed on it. If it lets go of the lien but won't release you, it gets no payment from Fannie Mae Source Fannie Mae D2-3.3-01. With any second lender, ask in writing: are you forgiving what I owe, or only letting go of your claim on the house?
State limits on collecting after a foreclosure may not reach a short sale. Your state's page says whether lenders there can seek a deficiency after a foreclosure, and a local attorney can tell you whether that covers a short sale.
Short sale vs. foreclosure: which is better?
A short sale usually means a shorter wait for your next mortgage: for a new Fannie Mae loan, usually four years after a short sale against seven after a foreclosure. A short sale, a deed in lieu and a foreclosure all end with you leaving the home, and they differ in how the house changes hands. A Handing ownership of your home to the lender so it doesn't foreclose. Whether any balance is still owed depends on the agreement, the loan and state law. Learn more → is when you voluntarily turn over ownership of your home to the lender to avoid foreclosure Source CFPB. Foreclosure is when the lender takes action to collect the debt by selling your home, and the process differs by state Source CFPB.
| Way out | How the house changes hands | Wait for a new Fannie Mae loan |
|---|---|---|
| Short sale | You sell to a buyer for less than you owe, with the lender's OK. | Usually four years |
| Deed in lieu | You sign the house over to the lender. No buyer needed. See the deed in lieu guide. | Usually four years |
| Foreclosure | The lender takes the house through your state's process. See how foreclosure works. | Usually seven years |
The Fannie Mae waits come from its Selling Guide, and can be shorter if you can document a hardship outside your control Source Fannie Mae B3-5.3-07. Waits for FHA, Freddie Mac, VA and USDA loans are in the after-the-sale guide's table.
Are more homes heading to foreclosure?
Yes. In May 2026, mortgage companies started foreclosure on 7,979 Fannie Mae and Freddie Mac loans, 577 more than a year earlier, according to the Federal Housing Finance Agency (FHFA), which oversees the two companies Source FHFA. If you're behind, a short sale is a race against that process: the sale has to close before the house goes to auction.
FHFA prints that count one month at a time, in its Foreclosure Prevention and Refinance Report. We keep every month in one record, so you can see the trend a single report can't show. It covers only loans Fannie Mae and Freddie Mac back, not FHA, VA, USDA or bank-held loans.
More Fannie Mae and Freddie Mac loans sent to foreclosure than a year earlier
Fannie Mae and Freddie Mac single-family loans referred to foreclosure each month, United States: 7,979 in May 2026. Monthly, June 2024 to May 2026.
The full monthly record, with a download, is on our foreclosure starts on Fannie Mae and Freddie Mac loans page.
What does a short sale do to my credit?
It's reported. FHA's rules say a pre-foreclosure sale is reported to the credit bureaus and will likely affect your ability to get another mortgage and other credit Source HUD Handbook 4000.1. Fannie Mae requires servicers to report short sales, deeds in lieu and foreclosures to the credit bureaus Source Fannie Mae C-4.1-01. On a USDA direct loan, USDA may report debt settled this way to the Internal Revenue Service (IRS) and the credit bureaus Source 7 C.F.R. § 3550.211.
None of these sources puts a number of points on it. What it does to your score depends on the rest of your report.
Will I owe taxes on debt forgiven in a short sale?
You might. When a lender cancels part of what you owe, the IRS generally counts the taxable amount as ordinary income. The lender may send you a Form 1099-C showing the amount canceled and the date, and you're responsible for reporting the right amount even if that form is wrong Source IRS Topic 431.
The tax break for the home you live in has mostly ended
A federal tax exclusion for mortgage debt on your main home now covers forgiven debt in only two cases: it was forgiven before January 1, 2026, or it was forgiven under an agreement entered into, and put in writing, before January 1, 2026 Source 26 U.S.C. § 108(a)(1)(E). It applies to a mortgage you took out to buy, build or substantially improve your main home, secured by that home, on up to $750,000 of that debt, or $375,000 if you're married filing separately Source IRS Publication 4681.
Two tax exceptions that still apply
- Insolvency. You can exclude forgiven debt to the extent you were insolvent, meaning you owed more than everything you owned was worth, measured right before the debt is forgiven Source 26 U.S.C. § 108(d)(3).
- Bankruptcy. Debt canceled in a bankruptcy case under Title 11, the federal Bankruptcy Code, can be excluded Source IRS Topic 431.
If you exclude forgiven debt, you report it on Form 982 and attach it to your tax return Source IRS Topic 431.
A nonrecourse loan, one you weren't personally liable for, is treated differently. When the lender takes the property to settle a nonrecourse debt, the IRS treats it as a sale for the full amount of the debt, and you have no ordinary income from canceled debt Source IRS Topic 431. That sale can still produce a taxable gain, and whether this applies to a short sale depends on your facts.
This is general information, not tax advice. A tax professional should look at your situation before you sign and before you file.
Questions to ask before you sign a short sale approval
Get the answers in writing, in the approval itself if you can:
- Does this waive the leftover balance?
- Do I have to put in cash of my own?
- What happens to my second mortgage or home equity line, and does that lender release me from the debt?
- When does the sale have to close?
- How will this be reported to the credit bureaus?
- Will I get a Form 1099-C for forgiven debt?
Questions about short sales
Is a short sale better than foreclosure?
It can be. For a new Fannie Mae loan, the usual wait is four years after a short sale and seven after a foreclosure. With an FHA pre-foreclosure sale, the lienholders forgive the leftover balance. Either way you leave the home, and both are reported to the credit bureaus.
Does a short sale hurt your credit?
Yes. It's reported to the credit bureaus, and FHA's rules say it will likely make it harder to get another mortgage. No official source puts a number of points on it. How much it matters depends on the rest of your report.
Can I buy a house after a short sale?
Yes, after a wait. For a new Fannie Mae or Freddie Mac loan it's usually four years, and for an FHA loan three, with shorter waits in some cases. See every program's wait.
Do I have to be behind to do a short sale?
It depends on the loan. Fannie Mae can review you while you're current if a hardship means you can't keep up much longer. An FHA pre-foreclosure sale requires you to be at least 61 days behind when the servicer approves it.
How long does a short sale take?
There's no set length. For a Fannie Mae loan, the servicer has 30 calendar days to answer in writing once it has the first offer and any application it needs, and the sale has to close within 60 calendar days of approval unless Fannie Mae gives more time.
Will I owe taxes after a short sale?
You might. Forgiven debt is generally taxable income unless an exclusion applies, such as insolvency or bankruptcy. The main-home exclusion now covers only debt forgiven before January 1, 2026, or under a written agreement made before then. See the details.
Find your state's foreclosure law
Your state's foreclosure page covers the law where you live, including whether lenders there can seek a deficiency after a foreclosure.
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
Protect yourself from scams
The FTC and CFPB describe these warning signs and the rules behind them:
- Upfront fees for promised relief are a warning sign. Under FTC mortgage-assistance rules, most companies that sell mortgage help cannot charge until a homeowner accepts a written offer from the mortgage company or lender. A separate FTC rule covers debt-relief companies that sell by phone and ties fees to a completed debt arrangement. It bars a fee until at least one debt has been settled or changed, the customer agrees to the arrangement, and the customer has made a payment under it. The FTC describes a narrow exception for lawyers who give help as part of the practice of law and are licensed in the state where the client or dwelling is. The lawyer follows that state's rules for attorneys, and advance fees are placed in a client trust account before services begin under state trust-account rules.
- HUD-approved foreclosure-prevention counseling is free. HUD’s national counselor line is 800-569-4287. The CFPB counselor finder lists agencies and their services. If an organization charges for help described as free HUD counseling, the CFPB finder can verify the agency and its listed services before any payment.
- A request to sign over a deed is a warning sign. The CFPB identifies title-transfer schemes among foreclosure-relief scams. Signing over title can mean losing ownership of the home; a lawyer can explain what a proposed document would do.
- Foreclosure protections depend on timing and the loan. Regulation X generally bars the first foreclosure notice or filing on a principal-residence loan until the borrower is more than 120 days behind, subject to exceptions. A complete assistance application can delay some foreclosure steps, but that depends on when it arrives; it does not necessarily stop every step. The CFPB warns about promises to “save” a home.
Free help before you sign a short sale
A HUD-approved housing counselor is a free adviser, approved by the government, who can go over your options with your mortgage company. A counselor can help you look at your finances, weigh your options and make a plan Source CFPB. Find one near you. A foreclosure attorney can read the approval before you sign it, and legal aid may do that for free.
Now you know how a short sale works: you find a buyer, your mortgage company approves the price, and the rules depend on who backs your loan. Before you sign, get in writing whether you'll owe the rest, ask about taxes on the forgiven debt, and have a free housing counselor or legal aid look at the approval.
Sources
- Consumer Financial Protection Bureau · What is a short sale? at consumerfinance.gov
- Consumer Financial Protection Bureau · What is a deed-in-lieu of foreclosure? at consumerfinance.gov
- Consumer Financial Protection Bureau · How does foreclosure work? at consumerfinance.gov
- Consumer Financial Protection Bureau · What a housing counselor can do, at consumerfinance.gov
- Fannie Mae Servicing Guide D2-3.3-01, short sales, at servicing-guide.fanniemae.com
- Fannie Mae Servicing Guide C-4.1-01, credit reporting, at servicing-guide.fanniemae.com
- Fannie Mae Selling Guide B3-5.3-07, waits for a new loan, at selling-guide.fanniemae.com
- Freddie Mac · Short Sale, at sf.freddiemac.com
- HUD Handbook 4000.1, FHA's pre-foreclosure sale, at hud.gov
- VA · Help to avoid foreclosure, at va.gov
- 7 C.F.R. § 3555.305, USDA guaranteed loans, at ecfr.gov
- 7 C.F.R. § 3550.211, USDA direct loans, at ecfr.gov
- IRS Topic 431, Canceled debt, at irs.gov
- IRS Publication 4681, at irs.gov
- 26 U.S.C. § 108, income from canceled debt, at uscode.house.gov
- FHFA · Foreclosure Prevention and Refinance Report, at fhfa.gov
We write with assistance from AI tools. Figures come from the data and sources named on this page.