Seller & buyer guide

Short sales & distressed property

If you owe more on your home than it's worth and you're facing a hardship, a short sale may help you avoid foreclosure. Here's how it works, what your lender will ask for, and what buyers should know before making an offer on one.

The basics

What is a short sale?

A short sale is when your lender agrees to let you sell the home for less than you owe on the mortgage. The lender takes a loss, but foreclosing usually costs it money too, so it weighs which option loses less.

Lenders generally approve a short sale only when the owner has a real financial hardship, like a job loss, divorce, serious illness or business failure. A drop in the home's value alone usually isn't enough. Most lenders also want a signed contract with a specific buyer before they'll decide.

Other options to ask about

  • Forbearance: the lender pauses or delays foreclosure
  • Loan modification or refinance to a payment you can afford
  • Deed in lieu of foreclosure: giving the home back to the lender
  • Bankruptcy, in some situations

Talk to your lender early, and get advice from an attorney or accountant about your situation.

If you're selling

What your lender will ask for

Proof of hardshipA hardship letter explaining why you can't keep paying.
Your financesBank statements, two years of tax returns, recent pay stubs and a financial worksheet.
Your loanYour latest mortgage statement and any other liens on the home.
Everything at onceMost lenders won't start reviewing until every document is in. Sending most of it doesn't work.
  • It takes time. Even a strong file can take months to approve.
  • Arm's length only. The buyer can't be a relative, and you'll sign a statement saying so at closing.
  • Renting it back after the sale depends on your lender's policy.
  • Who negotiates with the lender: Georgia REALTORS® advises that real estate agents shouldn't negotiate a short sale with the lender for you; Georgia's mortgage licensing law only exempts agents who pass information to the lender without a separate fee (O.C.G.A. § 7-1-1001). We can help with the paperwork and gather what your lender needs at no extra charge beyond our normal compensation, and an attorney can negotiate for you.

Talk to us early

If you think your sale may not cover what you owe, tell us as soon as possible. The sooner we know, the more options you'll have.

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The fallout

Credit, taxes & what you still owe

Your credit

Any time a lender takes less than it's owed, expect your credit to take a hit for several years. It's usually less damaging than a foreclosure.

Taxes

Forgiven mortgage debt is generally treated as taxable income. If the lender writes off $50,000, you may owe tax on it. Talk to a tax professional before you agree.

A deficiency

Approval doesn't always mean the rest is forgiven. Some lenders ask you to sign a note for the shortfall, so try to get in writing how the remaining balance will be handled, and have an attorney review it.

If you're buying

Buying a short sale takes patience

  • The lender has the final say. Short sale contracts are subject to the lender agreeing to the price, and it can say no.
  • Protect your timeline. Ask for the right to walk away if approval doesn't come by a certain date, and set closing a number of days after approval.
  • Not for tight deadlines. If you must close by a specific date, a short sale is usually the wrong fit.
  • Inspections: some buyers wait to pay for inspections until approval, but a clean offer that's ready to close is more likely to be approved.
  • Distressed sales reward speed. Buyers who can close quickly tend to get the best deals.

Get the full guide

We'll email you the Georgia REALTORS® brochure What Buyers and Sellers Need to Know About Short Sales and Distressed Property, free.

Behind on your mortgage?

Let's talk about your options.

Every situation is different, and every conversation is confidential. We'll walk you through what a sale could look like and who else you should talk to.

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Good to know: this is a general overview, not legal, tax or financial advice. Consult an attorney, accountant or financial advisor about your situation.

We're real estate agents, not attorneys. Nothing on this page is legal advice. Laws change and every situation is different, so always consult an attorney about your specific situation. Attorneys you can contact: Weissman PC · Blasingame, Burch, Garrard & Ashley, P.C.