What Is a Short Sale in Real Estate?

Required Short Sale Documentation

Lenders will request a number of documents before approving a short sale to ensure you’re truly experiencing financial hardship. Here are some of the documents you may be expected to provide.

• Hardship letter. Your hardship letter is an opportunity to explain to your lender why you’re experiencing financial struggles and can no longer afford your home. You can provide details about reasons such as a job loss or medical issues.
• Income verification. Your lender will want to see proof of income showing that your payments aren’t affordable. You can provide pay stubs or other documentation of how much income you earn.
• Tax returns. Tax returns are important to provide verification of income and additional insight into your financial situation.
• Bank statements. Finally, bank statements demonstrate your financial reserves and are important to show the lender you can’t afford to pay the difference between what your home is worth and what you owe.

Do You Qualify for a Short Sale?

Not everyone qualifies for a short sale. You must meet specific requirements to be eligible. Some of the things that lenders normally require include:

• Financial hardship. Lenders generally won’t allow you to do a short sale if you can afford your payments. You must show that you are struggling financially with too little money to cover your costs.
• Negative equity. Negative equity means you are underwater on your mortgage, which is defined as owing more than the home’s worth. When you are underwater, you can’t sell your home for enough money to pay the remaining balance on your loan.
• Insolvency: Insolvency means that you don’t have liquid assets, such as savings or investments, that you could use to pay the difference between what the home is worth and what you owe. If you have liquid assets, the lender expects you to use them to pay the loan in full rather than approving a short sale.

FHA and VA Short Sales

Short sales are available with both FHA and VA loans. However, the process works a little differently.

For FHA loans, you can do a short sale by participating in the FHA Pre-Foreclose Sale (PFS) Program. This program has specific requirements including being in default and experiencing financial hardship. HUD forgives the remaining debt, and you might receive relocation incentives and get closing costs covered.

Short sales are also available with VA Loans through the VA Compromise Sale Program. You must obtain a sales contract to be considered and must show financial hardship.

FHA Pre-Foreclosure Sale (PFS) Program:

The FHA Pre-Foreclosure Sales Program has specific requirements to meet. You must have an FHA mortgage, the home must be owner-occupied, and you must be experiencing financial hardship.

There are also rules for the offers you can accept, with the amount limited to a set percentage of the home’s appraised value depending on how long it has been on the market.

VA Compromise Sale Program:

The VA Compromise Sale Program allows you to sell your home for less than it’s worth if you demonstrate financial hardship and are in default. The VA pays off the remaining loan balance, but your entitlement is reduced by the amount the VA pays out, which can impact future VA loan use.

You should talk with a VA loan expert about reusing your VA Loan benefit after foreclosure or short sales to better understand the impact.

Pros and Cons of a Short Sale in Real Estate

A short sale can affect your credit score and overall financial situation for a long time, so it’s important to consider the pros and cons before you decide this approach is right for you.

Alternatives to a Short Sale

There are also alternatives to a short sale that you can consider before deciding on this approach. Here are some of your other options.

• Loan modification. Loan modification involves adjusting the terms of your mortgage to make payments more affordable. This option allows you to stay in your home, but you must be able to afford the new payments.
• Forbearance or repayment plans. Forbearance allows you to pause payments for a period of time when you’re faced with temporary financial hardship. Repayment plans allow you options to repay your past due balance and get current on your loan.
• Deed-in-lieu of foreclosure. Deed-in-lieu of foreclosure means that you agree to give your lender the deed and rights to the home voluntarily when you can’t make payments, rather than forcing your lender to foreclose.
• Selling the home with equity. It’s important to understand what home equity is, because if you have enough equity in your home, you don’t need a short sale. Equity is the difference between what the home is worth and what you owe. If you have equity, you can do a standard home sale and ideally walk away with some of the money from the sale of the home.

Loan modification, forbearance, and deed-in-lieu of foreclosure can all have an adverse impact on your credit score, with deed-in-lieu of foreclosure typically having the biggest impact. Selling your home with equity should not impact your credit score as long as you sell the home without falling behind on payments and repay your full loan balance.

Short Sale FAQs

Still need to know more short sales? Here are the answers to some frequently asked questions.

How Long Does the Short Sale Process Take?

The short sale process typically takes several months. You need time to provide documentation, get lender approval, determine the value of the property, find a buyer, negotiate a sale, and get to closing.

Will I Owe the Rest of the Loan After the Short Sale?

In some cases, you will owe the rest of the loan balance after a short sale. Whether the lender can collect this money depends on your state’s laws on deficiency judgements, the type of loan, and your negotiations with the lender.

What Is a Short Sale’s Impact on a Credit Score?

A short sale will damage your credit score, though not as severely as a foreclosure would. Your score will also take a hit if you are late on payments or go into default on your mortgage leading up to the short sale. Typically, your credit report also makes clear that you did not pay your mortgage debt in full.

Can I Buy Another Home After a Short Sale?

You should be able to buy another home after a short sale, but not immediately. You can usually become eligible for a new loan provided you meet your lender’s credit score and income requirements after around two years. You may want to explore VA, FHA, or USDA loans which can be easier to qualify for after a short sale.

Do I Need to Be Behind on My Mortgage to Qualify for a Short Sale?

Lenders generally will not allow you to do a short sale unless you are having trouble making payments. This means you are not only behind on your mortgage, but you can demonstrate financial hardship. However, you should reach out to your lender as soon as possible when you are worried about not being able to make payments to explore your options.

Final Thoughts: What a Short Sale Looks Like in Real Estate

A short sale in real estate can allow you to avoid foreclosure if your lender gives permission to sell your home for less than it is worth. This can be better for your credit and give you more control over the process, but it still means losing your home. If you need help with your mortgage payment, your lender may offer options so reach out as soon as possible.

*Eligibility to buy again will vary based on loan type and lender requirements.