What’s a Short Sale in Real Estate? This FAQ Sheet Breaks Down the Basics

4. What documents do I need to apply for a short sale?

Lenders aren’t in the business of giving away free money to just anyone. You’ll need proof that you’re in dire financial straits and unable to pay what you owe on your home.

“You’re going to have to show your lender all of your personal finance documentation. That’s going to include your most recent bank statements, your pay stubs, your credit card debt, and also your monthly expenses,” says Soldwisch.

“You’ll also have to provide documentation of your retirement savings — although your lender can never ask you to use retirement savings to get caught up on your mortgage.”

Aside from financial statements, your lender will also require several other documents when you apply for a short sale arrangement, including:

• Third-party authorization letter (gives your agent permission to work with your lender on the short sale)
• Client information form (your application)
• Tax returns from the past two years
• All bank statements from the last two months
• Most recent mortgage statement(s) (all mortgage loans on the property)
• Financial statement (including all assets and debts, such as retirement account statements, credit card debt, etc.)
•  Hardship letter

5. How is my home’s current value determined during a short sale?

The only way to qualify for a short sale is if you currently owe more than your house is worth. So, how is the current value determined? That depends.

There are basically two options to get your home’s current value: either with a broker price opinion (BPO) or an appraisal by a licensed appraiser.

“With a BPO, the agent prepares the valuation — versus a licensed appraiser, whose perception of the market can be different. Which one will be required in your short sale depends on the lender,” advises Soldwisch.

6. Who pays closing costs in a short sale?

In traditional home sales, closing costs are typically up for negotiation between the buyer and the seller.

The same is true with short sales, although in this scenario, you have a third party — the lender, who needs to approve those negotiations — which may throw a wrench into the works.

Your mortgage company may agree to pay the seller’s closing costs but refuse any requests to cover the buyer’s costs.

Some lenders will also ask for a contribution from the short seller, which is a payment made at the close of the sale. This contribution is requested to offset the lender’s losses and may be used to cover any closing costs the lender agrees to pay.

7. How does a short sale affect my credit score?

Going through with a short sale will have a negative impact on your credit.

In fact, FICO data suggests that a short sale and a foreclosure will have an equally negative impact on your credit score and recovery.

The news isn’t all bad, though.

“A short sale can have a serious impact on your credit,” explains Soldwisch.

“However, your credit score can recover more quickly after a short sale than it can after a foreclosure. And once your credit score has recovered, you’ll qualify for a guaranteed mortgage more quickly after a short sale versus a foreclosure.”

The impact on your credit from a short sale versus a foreclosure largely depends on your previous credit history. If you had great credit before the short sale, the negative impact would be a bit less than if you had a history of unpaid debt, defaults, and credit dings.

This is only true if you return to your good credit habits after the short sale by keeping your credit debt low and making payments on time. If you do, then your credit could potentially start to recover after two years post-short sale.

Unfortunately, there’s no guarantee that your credit will recover more quickly after a short sale than a foreclosure. However, a short sale is reported as “settled” debt, which is not the case with a foreclosure.

Debt marked as settled rather than paid isn’t great, but it’s better than having a foreclosure on your credit report.

Since a short sale reflects the borrower’s willingness to settle debt, many lenders will take this under consideration when you apply for future loans.

8. What are the tax considerations of a short sale?

Remember how the debt forgiven by your lender is kind of like free money (on paper)? Well, in some states, this forgiven debt may be taxable.

“Short sellers need to understand that in some states, after the mortgage company approves their short sales, they’ll receive 1099s for the amount of the discharged mortgage debt,” explains Soldwisch.

“So basically, the 1099 reflecting that discharged debt will show up on your taxes as if it were income that you received, which will have tax ramifications.”

The IRS refers to this loan forgiveness as a cancellation of debt. Whether or not it’ll be taxable depends on whether or not your state laws allow for recourse or non-recourse loans.

If yours is a recourse loan, the bank can go after your other assets to collect on the deficiency amount left after the home sale. Lenders who instead decide to forgive the remaining debt on a recourse loan will send you a 1099 because it’s considered income.

If yours is a non-recourse loan, the bank cannot go after your other assets to collect on any remaining debt. Any debt amount left after the house is sold to pay off a non-recourse loan is not considered cancellation of debt income. So, you will not receive a 1099.

9. Can I hire any agent to handle my short sale?

It’s in your best interest to hire an agent well-versed in short sales because they are different from a traditional listing.

Lenders require a lot of financial reporting that needs to be gathered and coordinated. Your agent will also help coach the buyer on how the short sale process works and keep their expectations realistic.

There’s a high rate of fallout when buyers don’t understand what’s happening during a short sale. When your buyer backs out, you’ll need to start the short sale process all over again with another buyer.

“Mortgage companies want you to use an agent to help you through a short sale,” says Soldwisch.

“Lenders are happy to pay the real estate fees because they know the short sale will be more successful if an experienced agent handles it. But, if you hire an agent who hasn’t gone through the process before, then you’re rolling the dice and hoping that it’s going to be successful.”

10. What are the alternatives to a short sale?

Believe it or not, the government and your lender don’t want you to default on your mortgage and face foreclosure — it’s bad for the economy and your lender’s bottom line.

So, the government provides a lot of resources to help you avoid foreclosures and short sales.

“One option is to borrow funds to make improvements to the house in order to raise the market value. Then you can sell it at a higher price to pay off the loan, including your delinquent payments, and maybe even get some money out of the property,” suggests Soldwisch.

“Also, many mortgage companies offer loan modification options, which restructure the loan terms. Rather than making up your missed payments, the deficiency total is added to your principal loan balance. I’ve had clients do that.”

One such modification option is the FHA-Home Affordable Modification Program (FHA-HAMP). This program helps FHA homeowners who are behind on their mortgages to reduce their monthly payments and avoid foreclosure, if you qualify.

Here’s a breakdown of the most common alternatives to a short sale:

Option	What it is	Who it’s best for	Key pros	Potential cons
Loan Modification	Adjusts your existing loan terms (e.g., lowers interest rate or extends repayment period)	Homeowners with temporary or reduced income who want to stay in the home	– Keeps you in your home – May lower monthly payments	– Can extend loan term – Requires paperwork & approval
Refinancing	Replaces current mortgage with a new one (possibly with better terms)	Homeowners with sufficient credit and equity	– Can reduce interest rate or payment – Avoids credit damage	– Not available if you’re already behind on payments
Forbearance	Temporary pause or reduction in mortgage payments	Short-term financial setbacks (e.g., job loss, illness)	– Buys time to recover financially	– Payments still accrue – Lump-sum repayment may be required later
Deed in Lieu of Foreclosure	Voluntarily transfer ownership of home to lender to satisfy the debt	Homeowners who can’t sell and want to avoid foreclosure	– Quicker process than foreclosure – May reduce credit damage	– Loss of home – May still owe deficiency unless waived
Renting the Property	Lease out the home to cover mortgage payments	Owners with marketable properties in high-rent areas	– Generates income – Can preserve ownership	– Still responsible for property management and mortgage

Pro tip: Some of these options — like loan modification or forbearance — require early communication with your lender. Don’t wait until you’re months behind. Lenders often have hardship programs, but you need to ask early and document your situation.

11. Is a short sale right for me?

When debt threatens the roof over your head, the situation becomes desperate, and a short sale may be the only viable alternative to foreclosure. But that’s not always the case.

“I’ve had financially distressed clients behind on their mortgage payments who didn’t realize they had equity built up. We were able to help renegotiate the loan terms or sell the properties to pay off their debts. A few even walked away with a bit of a payoff,” recalls Soldwisch.

“So, even if you feel hopeless, there are options and remedies that can help.”

When in doubt, reach out to a HUD-approved housing counseling expert who can help guide you toward the best available solution.

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