How to Short Sale a House: A Step-by-Step Process

A short sale occurs when a homeowner sells their property for less than the amount they owe on their mortgage, with the express approval of their lender. This situation occurs when a homeowner faces financial difficulties and the property’s market value has fallen below the outstanding mortgage balance. Proceeds from the sale are directed to the lender, who accepts a reduced payoff to avoid foreclosure.

Determining Eligibility and Preparing Documentation

Initiating a short sale requires demonstrating genuine financial hardship to your mortgage lender. Common situations that qualify as hardship include job loss, a significant reduction in income, unexpected medical emergencies, divorce, or a job transfer that necessitates relocation. The property’s current market value must also be less than the remaining mortgage balance, indicating an “underwater” mortgage.

Assemble a comprehensive package of documents for your lender, including a detailed hardship letter explaining your financial distress and inability to continue mortgage payments. This letter should be concise, factual, and clearly state your request for a short sale. Supporting financial documentation is also required, such as recent pay stubs, recent bank statements, and your last two years of tax returns and W-2s or 1099s. If self-employed, a year-to-date profit and loss statement and business bank statements are necessary. Also provide a list of all household expenses and recent mortgage statements.

Engaging a real estate agent with specific experience in short sales is an important step during this preparatory phase. Such an agent understands the complexities of these transactions, including lender negotiations and the extensive documentation involved. They can help in assessing the property’s value and guiding you through the initial information gathering. Their specialized knowledge is helpful.

Initiating the Short Sale Process with Your Lender

Formally engage with your mortgage lender to initiate the short sale request. This process begins by contacting your lender’s loss mitigation department and submitting the complete short sale package.

Upon receiving your short sale package, the lender will undertake an internal review to assess your financial situation and the property’s value. As part of this review, the lender will order a Broker Price Opinion (BPO) or an appraisal to determine the current market value of the home. A BPO, conducted by a real estate broker, provides an estimate of the property’s value based on comparable sales in the area and is often a quicker and less expensive alternative to a full appraisal. The lender uses this valuation to determine the potential loss they would incur and to decide if accepting a short sale is more favorable than proceeding with foreclosure.

The negotiation phase with the lender is a key part of this stage. Lenders may respond with counter-offers or specific conditions for approving the short sale. A key aspect of these negotiations is seeking a deficiency waiver, which means the lender agrees to forgive any remaining mortgage balance after the sale proceeds have been applied. Without a deficiency waiver, the homeowner could still be liable for the difference between the sale price and the amount owed, and this canceled debt could potentially be considered taxable income. While the Mortgage Forgiveness Debt Relief Act of 2007 provided exclusions for qualified principal residence indebtedness, any forgiven debt may still have tax implications, reported on IRS Form 1099-C.

Marketing the Property and Securing an Offer

Marketing the property and securing a purchase offer is the next step. Your short sale-experienced real estate agent will list the property, often explicitly noting its short sale status. Potential buyers need to understand the unique nature of the transaction and the potential for extended approval timelines.

Pricing the property competitively is an important strategy for a short sale to attract offers quickly. While the goal is to obtain an offer that the lender will approve, pricing it significantly below market value can attract more interest. The agent will conduct a comparative market analysis (CMA) to determine an appropriate listing price based on recent sales of similar properties in the area. This ensures the price is realistic and appealing to buyers, while also being justifiable to the lender.

Once offers are received from potential buyers, your real estate agent will help evaluate them, considering factors beyond just the price, such as the buyer’s financial qualifications and willingness to endure the potentially lengthy approval process. A strong offer, possibly from a cash buyer or one with a pre-approval letter, can be more attractive to the lender. The selected purchase offer, along with the buyer’s financial information, is then formally submitted to the lender for their review and approval. This submission means the lender will now consider the specific terms of the proposed sale.

Lender Approval and Closing the Short Sale

After a purchase offer is submitted, the lender undertakes a final review to decide whether to approve that specific offer. This stage involves the lender examining the proposed sale price in relation to their own valuation (e.g., BPO or appraisal) and the financial terms. The lender’s decision is heavily influenced by how the proposed sale minimizes their potential loss compared to a foreclosure action.

If the lender approves the offer, they will issue a short sale approval letter to the homeowner and the buyer. This letter outlines the approved sales price, any specific conditions for the sale, and the status of the deficiency waiver. It will also detail the approved closing costs, which the lender has agreed to cover or allow as part of the transaction. The terms within this letter must be carefully reviewed by all parties involved.

The closing procedures for a short sale resemble those of a traditional home sale, but with the added layer of direct lender involvement. The lender must approve the final settlement statement, also known as the Closing Disclosure, ensuring all financial aspects align with their approval letter. A title company and escrow agent will manage the final paperwork and ensure clear title is conveyed to the buyer. The homeowner will then vacate the property by the agreed-upon date, and the proceeds from the sale are disbursed to the lender.