What a short sale is
The Consumer Financial Protection Bureau defines a short sale as “a sale of your home for less than what you owe on your mortgage.” It calls it “a type of loss mitigation” and “an alternative to foreclosure, but because it is a sale, you will have to leave your home” (CFPB).
The “short” is the gap between the price and the payoff. In an ordinary sale, the title company pays the mortgage off in full at closing. In a short sale, the price is not enough to do that, so the lender has to agree to accept less and release its lien anyway.
A short sale makes sense only when you owe more than the house can sell for. If the house is worth more than what you owe plus the costs of selling, you can sell it the ordinary way and keep the difference, even during a foreclosure. Our guide to selling a house in foreclosure covers that case.
How a short sale works, step by step
- Ask your servicer. A short sale is a loss mitigation option, so it starts with an application to your servicer. The Federal Trade Commission notes that “before you can list your home as a short sale, your servicer or lender must approve and agree to accept the money you get from the sale” (FTC). If a foreclosure sale is scheduled, a complete application received “more than 37 days before a foreclosure sale” must be decided before the servicer can hold the sale (12 CFR 1024.41).
- List the house. The FTC describes the servicer working “with you and your real estate agent to set the sales price and review the offers.”
- Send the lender the offer. The lender reviews the price and the terms, and it can accept, counter, or reject.
- Get the approval in writing. The approval should state the price, the closing deadline, and what happens to the rest of the debt. The CFPB says that “you’ll need approval from your mortgage servicer to complete a short sale and have the difference between the sale amount and your outstanding loan balance forgiven by your servicer” (CFPB).
- Close. The title company pays the lender the approved amount and records the release of its lien. If there is a second mortgage or another lien, that holder has to agree to release it too.
What happens to the rest of the debt in Pennsylvania
The rest of the debt is forgiven only if the lender agrees. The CFPB warns that “in some states, after a short sale, your lender could sue you to collect the amount of the deficiency,” and advises: “If the lender waives the deficiency, get the waiver in writing” (CFPB). The FTC says the same: find out whether the lender “will fully waive the difference” and not separately seek a deficiency judgment.
Pennsylvania’s deficiency law protects owners after a sheriff sale. It applies “whenever any real property is sold, directly or indirectly, to the judgment creditor in execution proceedings,” and makes the court set the house’s fair market value before the lender can collect more (42 Pa.C.S. § 8103). A short sale is not an execution sale, so that protection does not apply to it. What you owe afterward depends on the written agreement with each lender.
Taxes on the forgiven debt
Forgiven debt can be taxable income. When a lender cancels a debt, it may file a Form 1099-C, and the IRS says that “unless you meet one of the exceptions or exclusions,” the canceled debt “is ordinary income” (IRS Publication 4681).
The exclusion for forgiven debt on a main home has ended. The IRS says that debt “cannot be excluded from income for discharges completed or discharge agreements entered into after December 31, 2025” (IRS Publication 4681; 26 U.S.C. § 108). Other exclusions can still apply. Debt canceled while you are insolvent, meaning your debts were more than the value of everything you owned, is excluded up to the amount of the insolvency, and so is debt discharged in a bankruptcy case.
Tax rules turn on details, so talk with a tax professional before you agree to a short sale, not after.
FHA, Fannie Mae, and VA short sales
If your loan is backed by FHA, Fannie Mae, or VA, the program’s own rules apply, and each has changed in the last two years.
| Loan | What the program calls it | Money to the owner | The rest of the debt |
|---|---|---|---|
| FHA | Pre-Foreclosure Sale | Up to $3,000 for owner-occupants who sell in good faith | Forgiven on the FHA loan |
| Fannie Mae | Fannie Mae Short Sale | $7,500 for relocation, for a principal residence, with conditions | Waived in most cases |
| VA | Short sale | $1,500 for relocation, for owner-occupants | Ask in writing |
- FHA. Since October 2025, the Standard Pre-Foreclosure Sale “is available for Owner-Occupant and Non-Occupant Borrowers and does not require verification of hardship.” The loan must be at least 61 days delinquent when the servicer approves it, and the owner must have used up or been found ineligible for the options to keep the home. The owner has four months from approval to get a contract of sale, and the house must be on the Multiple Listing Service (MLS) for at least 15 days before offers are reviewed. HUD defines the sale as one where lien holders “forgive the deficiency balance” (HUD Handbook 4000.1, Section III.A.2.j.ii).
- Fannie Mae. “The borrower is entitled to an incentive payment of $7,500 from Fannie Mae to assist with relocation expenses following the successful completion of a Fannie Mae short sale,” for a home that was the principal residence. The payment is not made when the borrower is required to contribute cash to the sale, and it applies only to loans Fannie Mae owns (Fannie Mae Servicing Guide D2-3.3-01).
- VA. “VA authorizes servicers to advance $1,500 in relocation assistance to borrower occupants who complete a short sale or who execute a DIL” (VA Manual M26-4, Chapter 5).
Your servicer can tell you who owns or backs your loan.
Credit, and buying a home again
The FTC says that “with a short sale or deed in lieu agreement, you still might be able to qualify for a new mortgage in a few years,” and that a foreclosure, “likely to be reported for seven years,” can have a greater impact. It suggests getting a letter from the servicer confirming the loan closed in a short sale, not a foreclosure (FTC).
- A new FHA loan. A borrower is “generally not eligible for a new FHA-insured Mortgage if they relinquished a Property through a Short Sale within three years,” but there is no wait if every mortgage payment was made on time in the 12 months before the short sale (HUD Handbook 4000.1, Section II.A.5.a.iii).
- A new Fannie Mae loan. Four years after a preforeclosure (short) sale, or two with documented extenuating circumstances, compared with seven after a foreclosure (Fannie Mae Selling Guide B3-5.3-07).
These are the programs’ minimums. A lender can require more.
What a short sale means for a buyer
For a buyer, a short sale is a purchase that needs a third party’s approval. The offer goes to the seller and then to the seller’s lender, which can accept, counter, or reject it, and the closing waits on the lender’s written approval. For FHA short sales, every party signs a HUD addendum confirming the sale is at arm’s length.
Our guides to short sale vs foreclosure and deed in lieu of foreclosure compare the other ways out.