A short sale happens when a homeowner sells their property for less than the amount owed on the mortgage, with the lender’s approval.
The lender agrees to accept the sale proceeds as full or partial payment of the debt — and in most cases also pays the normal selling costs such as agent commissions, title fees, and closing expenses.
Result: The seller usually has no out-of-pocket costs.
Sarah owes $350,000 on her mortgage, but her home’s current market value is only $280,000.
After losing her job, she can no longer afford her monthly payments.
Through a short sale, she sells the home for $275,000.
Her lender agrees to accept that amount, forgive the remaining $75,000 balance, and cover the typical closing costs so Sarah can move forward without added expense.
Short sales can be a solution for homeowners in a variety of financial or life situations.
Option | Credit Impact | Timeframe | Key Advantages | Key Disadvantages |
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Sell property for less than mortgage balance with lender approval | Moderate (50-150 points) | 3-6 months |
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Lender takes possession of property through legal process | Severe (200-300 points) | 3-18 months |
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Voluntarily transfer property deed to lender | Moderate (50-125 points) | 2-4 months |
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Negotiate changed terms with current lender | Minimal if successful | 2-6 months |
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A step-by-step guide through the short sale process, typically taking 3–6 months to complete. Each step builds toward lender approval and closing.
Lenders require documentation to confirm hardship and property value before approving a short sale.
When a lender forgives part of your mortgage balance, that forgiven amount may be considered taxable income by the IRS.
However, the Mortgage Forgiveness Debt Relief Act may exclude certain canceled mortgage debt from taxation.
You’ll receive a 1099-C form for any forgiven debt over $600.
Consult a qualified tax professional to understand how these rules apply to your situation and whether you qualify for relief.
Each state has its own laws regarding deficiency judgments—whether a lender can pursue repayment of the forgiven balance.
In Arizona, most primary-residence short sales are protected by anti-deficiency laws, meaning lenders generally cannot pursue you for the unpaid portion after closing.
Still, every lender and situation is different, so it’s important to confirm this protection applies to your property.
Legal counsel can help you review your rights and negotiate any release language in the lender’s approval letter.
Keep organized records of all short sale communications, approvals, and closing documents, including:
Proper documentation protects you in the event of tax questions, credit reporting errors, or future legal issues—and simplifies tax filing.
Professional | Description | Key Responsibilities | Why They’re Important |
|---|---|---|---|
Specialized agent experienced in short sale transactions and lender negotiations. |
| Short sales differ from traditional home sales. An experienced agent understands lender expectations, negotiates effectively, and increases the chance of approval while protecting your interests. | |
Legal professional specializing in real estate and short sale transactions. |
| A real estate attorney ensures all agreements are legally sound and that you’re protected from future liability. They can also confirm that your lender’s release truly clears the remaining debt. | |
Certified tax expert familiar with mortgage debt forgiveness and real estate taxation. |
| Forgiven mortgage debt can create taxable income. A qualified tax professional helps minimize that impact, ensures accurate reporting, and keeps you compliant with IRS rules. |