What is a short sale on a house?
A short sale in real estate is a sale where your home sells for less than the amount you owe on the mortgage, and your mortgage servicer must approve it before it can close. From the seller side, you usually submit a loss mitigation application, hardship documents, income documents, and a purchase offer. The approval letter should say what happens to the unpaid balance. If any debt is canceled, it may affect your taxes and credit.
Key facts
- The CFPB defines a short sale as selling your home for less than what you owe on your mortgage.
- You need approval from your mortgage servicer, and the owner of your loan may also have to approve.
- Fannie Mae servicing rules use 30 day response periods in specific short sale situations.
- If a lender waives a deficiency, the CFPB says to get the waiver in writing and keep it.
- IRS Publication 4681 says canceled debt is generally income unless an exception or exclusion applies.
Selling in Indiana, Ohio, Wisconsin, Tennessee or Georgia? Get a written cash offer in 24 hours, no obligation.
Get my cash offerWhat a short sale means for the seller
A short sale happens when the home sells for less than the mortgage debt. The CFPB defines it as a sale of your home for less than what you owe on your mortgage.
It is a sale, not a loan change, so the seller leaves the home after closing. The CFPB calls a short sale an alternative to foreclosure, but says you will have to leave your home.
| Point | Seller meaning |
|---|---|
| Sale price | The price will not fully pay the mortgage debt. |
| Approval | The mortgage company or servicer must approve the sale before it can close. |
| Debt left over | The approval letter should say whether the difference is forgiven, waived, paid by you, or still claimed. |
| Related issue | If you are comparing it with selling a house with a mortgage, the key question is whether the sale proceeds fully satisfy the mortgage debt. |
Why lender approval controls the sale
You cannot complete a short sale just because you have a buyer. The CFPB says you need approval from your mortgage servicer to complete a short sale and to have the difference between the sale amount and loan balance forgiven.
The CFPB also says you must request a loss mitigation application, send a complete application and supporting documents, and receive approval from your mortgage servicer and loan owner. If foreclosure has started, a short sale may be one topic to compare with selling a house in foreclosure.
On a Fannie Mae short sale, a contract that will not fully satisfy the debt must include a contingency making the sale depend on agreement from the mortgage holder and mortgage insurer, if any. That means the buyer's offer is only the start of the approval process.
- The servicer reviews the hardship package.
- The loan owner may also need to approve.
- A mortgage insurer may need to agree if the loan has mortgage insurance.
What goes in the hardship package
Sellers often call the loss mitigation file a hardship package. For Fannie Mae, hardship documentation is tied to Form 710 and hardship type, and a Borrower Response Package is not complete if it is partly filled out or missing required income, hardship, or IRS IVES Form 4506-C documents when required.
These papers are the file the servicer reviews with the short sale request.
- Hardship documentation.
- Income documents when required.
- Form 710 when Fannie Mae requires it.
- A purchase offer and sale contract.
- IRS Form 4506-C when Fannie Mae requires it.
How long short sale approval can take
A short sale cannot be timed from buyer acceptance alone because the servicer and loan owner approval must happen. Fannie Mae rules give useful markers for loans handled under that guide.
| Guide | Timing stated in the guide |
|---|---|
| Fannie Mae BRP receipt | The servicer must acknowledge receipt within five business days and say whether the package is complete or incomplete. |
| Fannie Mae complete BRP review | The servicer must review and evaluate a complete BRP and communicate a decision no later than 30 days after receipt of a complete BRP. |
| Fannie Mae initial short sale offer | Within 30 calendar days after a complete BRP, if required, and an initial short sale offer, Fannie Mae's response must be in writing and approve, counteroffer, or decline. |
What happens to the unpaid balance
The shortfall is the difference between the sale amount and your outstanding loan balance. The CFPB says a short sale needs servicer approval to have that difference forgiven by the servicer.
Do not rely on a phone comment about forgiveness. The CFPB says that if the lender waives the deficiency, you should get the waiver in writing and keep it for your records.
The unpaid balance is handled differently depending on the loan and written approval. Fannie Mae says the mortgage holder may require the borrower to contribute funds to reduce its loss.
State law and loan program rules can also affect the unpaid balance. The notes below are limited to the state and program rules stated by the listed sources.
| Rule source | What it means |
|---|---|
| Indiana | Indiana's Department of Financial Institutions says state law does not protect you from liability for the unpaid balance. For an Indiana short sale, do not treat the shortfall as waived unless the written papers say it is waived. |
| Ohio | Ohio Revised Code 2329.08 says certain mortgage related deficiency judgments after a judicial sale become unenforceable after two years from confirmation. It also says a waiver during that two year period must be written and filed with the clerk of the court that rendered the judgment. |
| HUD Section 184 | HUD's preforeclosure sale rule says a short sale includes junior lienholders agreeing to release liens and forgive the deficiency balance. It also says sale completion is subject to Servicer and HUD approval, and after receipt of designated net sale proceeds the Servicer must discharge any remaining debt and release the lien. |
How canceled short sale debt is taxed
Canceled short sale debt can be taxable. IRS Publication 4681 says that, generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the unpaid amount is canceled debt.
IRS Publication 4681 also says you must report canceled debt as gross income unless an exception or exclusion applies, even if you did not receive Form 1099-C. The lender must file Form 1099-C and send you a copy if canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or other listed entity.
For 2025 guidance, qualified principal residence indebtedness can be excluded from income for discharges before January 1, 2026. The same IRS publication says that qualified principal residence indebtedness cannot be excluded for discharges completed or discharge agreements entered into after December 31, 2025, so use IRS guidance for the sale year.
Qualified principal residence indebtedness means a mortgage you took out to buy, build, or substantially improve your main home. If the short sale involves another kind of debt, do not assume the main home rule applies.
How a short sale affects credit
A short sale can still hurt credit. The FTC says short sales, deeds in lieu, and foreclosures affect credit.
The CFPB says short sales are typically less expensive and take less time than foreclosure, and can do less damage to credit. The FTC says foreclosure is likely to be reported for seven years and can have a greater impact on future credit than short sales or deeds in lieu.
Keep a paper trail. The FTC says to get a letter from your servicer or lender confirming that your loan closed in a short sale or deed in lieu agreement, not a foreclosure.
Frequently asked questions
Is a short sale the same as foreclosure?
No. The CFPB calls a short sale an alternative to foreclosure, but it is still a sale, so you leave the home. The FTC says foreclosure can have a greater impact on future credit than a short sale or deed in lieu.
Will the lender forgive the remaining mortgage balance?
Only if the written approval or closing papers say so. The CFPB says you need servicer approval to have the difference between the sale amount and loan balance forgiven. If the lender waives the deficiency, get that waiver in writing.
How long does short sale approval take?
For Fannie Mae loans, the guide uses a 30 calendar day response period after a complete BRP, if required, and an initial short sale offer. Missing required documents can make the package incomplete.
What is in a short sale hardship package?
The CFPB says you need a loss mitigation application and supporting documents. Fannie Mae's guide includes items such as Form 710, income documentation, hardship documentation, and IRS Form 4506-C when required.
Will I owe taxes after a short sale?
You might, if part of your mortgage debt is canceled. IRS Publication 4681 says canceled debt is generally reported as gross income unless an exception or exclusion applies. Use IRS guidance for the year the debt is canceled.
Does a short sale damage credit less than foreclosure?
It can. The CFPB says short sales can do less damage to credit than foreclosure, and the FTC says foreclosure is likely to be reported for seven years and can have a greater impact on future credit. A short sale still affects credit.
Can I sell to a cash buyer in a short sale?
Selling to a cash buyer can be one option, but if the price will not pay the mortgage in full, the servicer and loan owner still must approve the short sale. The approval letter should state what happens to the shortfall.
Sources
Checked against each source on November 3, 2026. This page is general information, not legal or tax advice.
- What is a short sale? (Consumer Financial Protection Bureau)
- Avoid foreclosure (Consumer Financial Protection Bureau)
- 24 CFR § 1005.753, Pre-foreclosure sale (Legal Information Institute / Electronic Code of Federal Regulations; HUD regulation)
- D2-3.3-01, Fannie Mae Short Sale (Fannie Mae Servicing Guide)
- D2-2-05, Receiving a Borrower Response Package (Fannie Mae Servicing Guide)
- Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (Internal Revenue Service)
- Trouble Paying Your Mortgage or Facing Foreclosure? (Federal Trade Commission)
- Annual Report 2016 (Indiana Department of Financial Institutions)
- Ohio Rev. Code 2329.08 (Ohio Laws / Ohio Revised Code)
Related seller questions
- Can you sell a house with a mortgage?
- Can you sell a house in foreclosure?
- How long does it take to sell a house?
- How do you sell a house with a lien?