How Does a Short Sale Work for Buyers and Struggling Sellers?

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Welcome

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, I am the Mortgage Mom, and today we are talking about short sales. No, I do not believe we are going to see a massive number of short sales hit the market like we did during the Great Recession. But I do believe we are starting to see more short sales come to market.

Who is ending up in a short sale

Most of the properties coming to market as short sales belong to borrowers who bought in the last few years and put very little money down — VA loans, FHA loans, and even very low down payment Fannie Mae and Freddie Mac conventional loans. We are seeing this because certain areas across the nation have started to come down a bit in value, and you are going to have things that naturally occur throughout life: a divorce, a job loss, an illness, something that was not anticipated. The easiest thing to do would be to sell, but then there really is not enough equity to get out of the property.

So I did want to talk about short sales. They are not something that went away and is never coming back. They are part of a very typical market. Before the pandemic we definitely had short sales — small percentages, but they were there — and I am starting to see more of them pop up. They can be a very good deal for a buyer, and they can be very helpful to a seller, but it is very important to understand how they work: what you need to do, how it gets sold, what the process is as a buyer, and how much patience you need to buy one of these properties.

This is an interactive live show, so please put your questions in the chat and I will read them out loud and answer them. I stream to Facebook and YouTube at the same time, so if you hear me answer a question you cannot see in your feed, somebody asked it on the other platform.

I have been in this business a long time. I actually started before I was licensed, working for my parents in real estate — answering phones, running the MLS, booking appointments for them to show property — then I got my own real estate license, and later I moved into mortgage lending. I have seen short sales, I have worked short sales, and I have sold short sales as a Realtor. It is very important that you, or the real estate agent you are working with, have the knowledge and have done this before, because short sales are not easy. They have to be executed accurately.

I am going to start with sellers and then move to buyers. Buyers, do not go anywhere — or if you are watching later, skip ahead to the section where I get into buyers.

Sellers: call before you miss a payment

Sellers, you are going to hear a lot of things that are not necessarily accurate. So the first thing I want to tell you: if you feel you are at the point where you are going to miss a payment, or you think you can make one more but you do not know about the one after that, do not wait until you are behind on that mortgage. Call immediately. Get on my calendar if you want to talk to me, and I will help guide you. But the most important phone call is to the number on your mortgage statement. Do not be scared to call. Nobody is going to yell at you, belittle you or make you feel terrible.

If you are getting to a position where you may need to sell and you might not have the equity to get out, so it would turn into a short sale, call your servicing lender. When they answer, tell them you want to talk to loss mitigation, that you are considering a short sale, and that you need help. When you get to the right department, ask them to provide you with a short sale package. Your lender is going to give you a package that you have to complete and return in order to get approved for the short sale.

Just because you are behind on payments does not automatically make you somebody they are willing to do a short sale with. You need to show evidence, and give them a package and information that explains your circumstances and why you are falling behind and will not be able to keep up. So no matter what, call your lender, and if you need my help, book an appointment through the calendar at mortgagemomradio.com. You get to ask me every question you might have, and I will help guide you.

Prices are not falling nationally

I also want to mention that prices are not falling nationally at this point in time. Not yet. I am not making a blanket statement that property values are dropping all across the nation. Right now there are certain pockets of certain states that have had some decline, and it is a small amount. Nationally, we are actually up 1.6% year over year.

Why a small down payment can leave a seller short

So think about this for a minute. Say you bought a house recently with a VA loan, an FHA loan, or a Fannie Mae or Freddie Mac conventional loan with very little down, and property values have not increased since — maybe they have even decreased a little. When you sell, you have costs to pay: real estate commissions, and depending on the state, the cost of title, escrow and an attorney. Those selling costs are typically a larger percentage than the money you put down on the property, which would leave you short. If you do not have the cash in hand to bring in, make up the difference and walk away, then you need a short sale.

You do not always have to be behind

So you are going to call your mortgage lender, and you can call me. You do not always have to be behind to do a short sale. Fannie Mae and Freddie Mac will consider a borrower who is still current if a qualifying hardship makes default likely.

I want you to hear this too. If you stop making payments, your credit suffers. If you need to rent a place after you get out of the house you are in, it is going to be very difficult to get a rental when they check your credit and see you were behind on the mortgage. So if you can at all avoid missing your mortgage payments, even if you are struggling, it is really important. Letting a credit card payment go late is definitely better than letting your mortgage go late. If I own a property I want to lease, and I pull somebody's credit and see a few recent credit card issues but a mortgage paid on time every single month, I am more likely to say okay than if they let their mortgage go — because that tells me they might stop paying rent if times get tough. So if you do not have to miss a payment, do not.

FHA is different

FHA's standard short sale is different. With Fannie Mae and Freddie Mac, you do not have to be behind to be considered when there are qualifying circumstances. With FHA, the borrower must be at least 61 days behind when the short sale is approved. Calling before the first missed payment is still the right advice. Get the short sale package, figure out who you are going to talk to — me, a real estate agent, somebody who understands your circumstances and can help you complete the package for the lender — and make sure that by the lender's guidelines you are going to qualify for the short sale before you let a payment go late and damage your credit. I still recommend you call your mortgage lender, me and a Realtor before you miss a payment.

Forgiven debt can be taxable

The other thing you need to know as a seller is that forgiven mortgage debt can be taxed, and there are different guidelines by state. I am not going to go into those guidelines, because I do not want you to get the wrong information. The right person to talk to is your CPA or tax advisor, whoever prepares your tax returns.

Here is the idea. Say the property sells for less than you owe, and after the selling expenses the bank relieves you of the difference. That forgiven amount will most likely come to you on a 1099, and you will pay taxes on the debt they relieved you of. So call your tax preparer in the state where you live to find out exactly what a short sale would cost you. There used to be a tax break for this that has expired, and whether it will be extended again, I do not know. Get into the tax side of this with your tax professional.

The numbers behind the rise

Let me give you an idea of where things are, short sale-wise and foreclosure-wise. Properties with a foreclosure filing: the latest is 40,277, in August of this year, up 13% from a year ago. The source is ATTOM, released on September 17. Foreclosure starts, meaning the process is starting: 25,894, up 7% from a year ago, also from ATTOM for August. FHA loans 30 or more days late: 11.79%, up 1.22 points from a year ago.

So again, there are things that happen naturally over the course of time. This is not a video about the world collapsing and a wave of foreclosures and short sales. This is about moving into a post-pandemic, more normal economy — a more normal market than the one we were in before.

Underwater borrowers, and this is where we are going to see these: about 813,000, up 44% from a year ago, according to ICE as of the end of June. Short sales are up about 16% from a year earlier, according to Realtor.com.

Why the underwater headline is not as wild as it sounds

Underwater borrowers up 44% — you might think that means the market really is shifting and everything is dropping. No. What it means is that somebody who bought a few years back had huge appreciation: they could have bought with very little down and been sitting on real equity a year later. Somebody who bought more recently has not seen values appreciate very much since. So the increase this year is not as wild as it sounds, but it makes a fabulous headline to get people to click.

Overall foreclosure activity remains below pre-pandemic norms, and short sales were about 0.6% of all home sales in 2025, according to Realtor.com. Not a huge percentage. This is a rise from a very low base, not 2008. So yes, we are starting to see them, because appreciation has slowed down and pockets across the country are starting to decline a bit. Small percentages, but yes. Other areas, no. Low down payment borrowers, always. Somebody goes through a divorce, somebody gets sick, somebody loses a job, somebody did not put much money down when they bought — they could very easily end up a little upside down and need to do a short sale.

Who to call, and why the agent matters

Let me talk about what matters most. Number one, like I said at the beginning, call your loan servicer and get your package. Number two, give me a call if you would like to talk or you need help. Number three, work with a real estate agent who has done short sales before. If they have never done one, they have no idea what they are getting into. It is a lot of process for a Realtor. You are basically going to give your mortgage company permission so your Realtor can talk to the servicing company on your behalf, because you are going to need that help while you are working during the day. So make sure you have an agent who understands the process.

The package, when you fill it out, is equally important. By Fannie Mae's rules the mortgage company has to give you an answer within 30 days, and it can approve you, counteroffer or decline you. If they decline you, you are starting over from scratch, and many times they decline because the package was not completed accurately or fully, or the reason you need the short sale was not completely documented. Declined, go in again. Declined, go in again. Another 30 days every single time. Working with a real estate agent who has done these before helps the process go smoothly. I cannot stress enough how important that piece is.

What counts as a real hardship

The lender wants a real hardship, and the change in circumstances has to be documented. “It just got too expensive” is not something they are going to approve a short sale for. It needs to be something like a death in the family; the primary wage earner losing their job and the household income dropping significantly; a long-term disability, where you got hurt and went from full-time work to disability; a serious illness that stopped you from being able to work; a divorce or a legal separation; high medical bills. You have to be able to document why you are suddenly in this situation.

So make sure you fill the package out correctly, make sure the agent you are working with knows what they are doing, or reach out to me and let me help guide you from the very beginning through the end. I do this because I want to help everybody I possibly can.

The balance that is left over

So what happens after? The balance that is left over. In some states, after a short sale, your lender could sue you to collect the amount of the deficiency. Fannie Mae and Freddie Mac have their own guidelines around that piece, and California has its own. And again, taxes: talk with the CPA you work with about what could or could not happen if you, the seller, do a short sale.

There is more we could go into, so if you are a seller who is struggling and has more questions, go to mortgagemomradio.com and book an appointment with me. Let's talk about your scenario and your situation, and see if we can help get you pointed in the right direction, step by step.

Watch out for short sale scams

Last thing for sellers before I jump into buyers: watch out for scams. If you find something online saying they will help you with your short sale package, and they are asking you for payment up front, asking you to pay them to help you, or asking you to make your payments to somebody other than your bank, watch out for all of that. Just run as fast as you can. There are tons of scams around this. Do not fall for it.

Buyers: is a short sale really a better deal?

Okay, welcome back. Buyers, let's get into short sales for you. A lot of times buyers feel a short sale is going to be a good deal, and many times it can be. I have done a lot of lending on and selling of short sale properties, and many times you do end up with a little bit better deal than you would buying from a private owner in a typical resale. But the way it works is different from a foreclosure, and I want buyers to understand what they are getting into, and what the banks are doing when they decide what they are willing to sell the property to you for.

The first thing that happens is that you see the property listed online, and you see the price it is listed for. That list price is the real estate agent's estimate of what the bank is going to be willing to sell the property for. You walk in and go, this is a great deal — it is less than the last one that sold, same square footage, same tract, same everything. So you make your offer, and the seller signs the contract and accepts your offer, because they are the seller of the property.

What the seller's bank does with your offer

But then the real estate agent takes that package we just got done talking about from the seller, to make sure they get qualified for the short sale, along with the contract you signed offering to buy the house and your pre-approval, and sends the whole package to the seller's lender. That lender reviews the entire scenario — the seller, the contract — and orders a third-party review of the value of the property. Then it comes back with an approval, an approval with a counteroffer (“no, we are not willing to take that price”), or a decline. Most likely a decline comes back when there is a problem with the seller qualifying for the short sale.

So when you are buying a short sale, make sure you are ready to go, ready to close, and that you come with a lot of patience. It could be months that you are waiting, and when I say months, I am not joking. Years ago a very good friend of mine bought one, and it took a very long time before the short sale was approved and the property closed.

Buying as-is, and doing things backwards

Because you are coming in with patience, should you make an offer at a lower price than what the last one sold for? Absolutely. However, most of the time the bank is going to sell the property with no repairs and no credits: “We will approve this short sale at this number, and you are buying the property as-is. Take it or leave it.” So be prepared for that, and go in and get your physical inspection done.

For a lot of clients this is going to feel like doing things backwards. You are signing a contract without knowing whether it will be approved. Escrow is getting opened even though nobody knows for sure it is going to close. You are spending money on a physical inspection to make sure you know everything about the property and still want to move forward. You are going to get your loan application going, get it disclosed, sign all your disclosures, get underwritten and get approved — because when the bank finally comes back and says yes, it is go time, and you have a very short period to get it closed and get the property you wanted.

I can see Lisa just jumped on: “Yay, I got you live finally! I love you, you're amazing.” Lisa, thank you so much for joining. And again, if you have questions about anything I am talking about, or something you know that would be great for people to hear, please put it in the chat. This is an open conversation.

So for the buyer: make sure you know everything there is to know about the house, expect to do things a little backwards, and make sure you have patience, because it can take time. It truly can. Sometimes I have seen them go fast, start to finish.

A fully underwritten approval and a careful rate lock

When it goes well, you write the contract, an agent who knows what they are doing and has done a lot of these puts the package together with the seller and makes sure it is all completed accurately, and your pre-approval — fully underwritten, with a commitment from your lender — goes in that package as well. That way the bank knows you are not just a pre-qualification that maybe can get financing, but a done deal if they just accept the contract.

We also have to be really, really careful with your rate lock. Since we do not know how long it is going to take to get a response from the bank, we are going to be careful about locking in an interest rate, which means you are going to be floating with the market. We may want to wait a bit to do that rate lock, or, if the property has already been pre-approved for the short sale and we have a better idea of how long it will be to closing, we could lock, maybe for a little longer than usual.

So can you get a better deal on the property, and do you typically get a little bit better deal? Yes. Are you getting foreclosure pricing? Absolutely not. The bank is trying to recoup as much as it possibly can when it approves a short sale. It wants to get as close to the property's value as it can, to mitigate as much loss as it can. So are you going to get a better deal than on the neighbor's house in a normal resale? Yes. Are you going to get a better deal than buying a foreclosure? No. Go in with your eyes open, be prepared, and make sure everything is being done the right way.

I wrote this down because I want to say it really clearly. Thinking your short sale is a ticket to a great deal? Maybe — but go in with your eyes open. I think it is more than maybe: I think you will get a little bit better price than you would in a typical sale, but not foreclosure pricing. After the seller accepts your offer, the seller's bank still has to approve it, and that can take weeks, sometimes months. Sellers, I hope you heard that, and remember how important it is to work with the right real estate agent. Once your offer gets accepted, everything moves super fast. So we are going to walk in with a very strong, clean, fully underwritten loan commitment, not just a pre-qualification letter, to send to the bank with your offer.

Q&A: is a reverse mortgage a good idea for a retired parent?

Lisa says: “I know this is not about reverse mortgages, but I want to know if it's a great deal for my mom, who's retired. I want her to enjoy her retirement using her home for her retirement. She totally deserves it.”

Lisa, that is a great question, and I have told everybody all along: if you have a question that has nothing to do with today's subject, it does not matter. Ask away.

I feel a reverse mortgage is very good for people whose home is basically their retirement vehicle, their retirement asset. Maybe they do not have a pension or a 401(k), or money sitting in IRAs or annuities that are paying them. All they really have is maybe a small amount of Social Security and a home they worked their whole life to pay for, free and clear. That home can then start to work for them. They could pull money out of it with a reverse mortgage to make retirement more affordable and more comfortable. They can take one lump sum, or take a small amount every month; there are a lot of different ways to go about it, so it does not necessarily eat up all of the equity right out of the gate.

It can be a fabulous vehicle for somebody who really just has a house and their Social Security, because it can make retirement much more comfortable and help them stay in their home. It has also worked out really well for clients who have come to me and said, my mom is getting older, it is time for full-time care, we cannot do it ourselves, and she does not want to move into a care home. We have been able to get the funds they needed to keep her comfortable in her own house with round-the-clock care.

So there are a lot of great upsides to reverse mortgages. I would recommend that we jump on a call, talk about it, and get a little more information about your mom, and I can put together numbers so you can at least see what it would look like. Then you and your mom can talk, or all three of us can get on the phone. The first place to start is to understand the program, then see the numbers, and then decide if it is something that works out for you and for your mom.

Q&A: is the commission still the same on a short sale?

I had a question come in by text — the text messages you get about what the show is about each week. Somebody sent: “Is commission still the same?” I believe the question is about real estate commission on a short sale, and the answer is that it depends on the bank and what it will approve. Most of the time the listing agent puts in the contract what the buyer's agent wants to be paid and what the listing agent wants to be paid, and that becomes one of the terms the bank is going to approve, counter or deny. When I did a lot of short sales, I used to see the bank come back and say what it would approve for commission, and that is what was paid, even if more was asked for.

When I was a Realtor doing short sales, prices were a lot lower than they are today, and the commission a buyer's agent typically received was higher; it has come down over the years. But it is all a negotiation, and it is up to the bank at the end of the day. The two agents put in what they want, the contract goes to the bank, and the bank decides what commission is paid to both agents. Great question — I believe this was from Michelle.

Q&A: would a reverse mortgage still help with Social Security and a pension?

Lisa asks: “Will she still benefit? She does have Social Security and a pension. She has a bad taste about reverse mortgages because of her best friend, who did one and it didn't pan out for her.”

A lot of people have a bad taste in their mouth about reverse mortgages, and often it is because they did not go into them understanding how they work. The concern is usually that you are going to live in the home with a reverse mortgage and, by the time you pass away, there is going to be no equity left to pass on to your heirs. That certainly can happen, depending on when you start the reverse mortgage and how long the loan is outstanding between the time it begins and the time it ends.

It is all about whether Mom is comfortable. If her Social Security and her pension are more than enough to keep her comfortable, having fun and enjoying life, and there is absolutely no reason for her to tap into her property, then I would say maybe do not. If she could be enjoying retirement at a higher level, then I would say it is something we explore.

There are a lot of different ways to use a reverse mortgage, and it really is a great product, but it depends on the person and whether it is right for them. That is why there are so many different loan programs: there are so many people in the world, so many different scenarios, and so many people who need something completely different from someone else. Lisa, I love the questions. Keep them coming.

Q&A: will I owe the difference?

Another question came in: “Will I owe the difference?” This goes back to short sales. It depends on the loan and the state. Remember, I told you I was not going to go deep into that part, because it really does depend on where you live, where the property is located, how you are taxed and what you are responsible for. What you want to do as a seller is ask the lender to waive the deficiency. When you go in with your short sale package, make that very clear, ask for it, and get it in writing. You will probably also want to talk to a real estate attorney to make sure things are put together right.

California is where it gets kind of tricky: California bars a deficiency after a lender-approved short sale of a home with up to four units. But every state is so different, and I do not want to give you information that is wrong. Talk to your CPA — absolutely start there — and you may also need to reach out to a real estate attorney.

Do I have to be behind, and how long until I can buy again?

Do I have to be behind on my payments to do a short sale? Sometimes: FHA does require that you are 61 days behind. But before you get that far behind and then find out you do not qualify for the short sale, talk to somebody first, and let's decide whether your situation looks like one a bank would approve before you let those payments go. With Fannie Mae and Freddie Mac conventional financing, no, you do not have to be behind for them to consider your circumstances.

How long until I can buy again? That is a great question, and it depends on whether it is an FHA loan or a conventional loan you are getting, and on whether you got behind before the short sale. Some very basic guidelines: for Fannie Mae, you are looking at four years, or two years with extenuating circumstances. FHA has its own waiting period, and it can be shorter in some circumstances. That is something you and I should talk through before you miss a payment and consider a short sale: your goals, your plans, whether you are going to buy again, and how long it would be before you could.

Recap for sellers and buyers

So I think I hit most of it. Sellers, you know what you have to do. Buyers, you are going to get a little bit better deal than the house next door, but not the kind of deal you would get on a foreclosure. Go in very prepared and fully underwritten, and expect to do things backwards: physical inspections, escrow opening, full approval on your loan. It will feel a little weird because it is happening in the opposite order, but you will probably end up with a little better price than you could have bought the next-door neighbor's house for.

And sellers, please reach out to your bank, get your short sale package, work on it and fill it out correctly, and make sure you are talking to a real estate agent who has done this before. If you need help, reach out to me. I would be happy to help guide you and tell you who to call first, and who to call next.

Q&A: should Mom stay put or look at a reverse mortgage?

Lisa asked whether her mom, who still owes a little on her home and has a modest monthly payment, should stay where she is or still think about a reverse mortgage.

Lisa, honestly, I would tell you to just call me, because it is so dependent on your mom. Is that payment killing her? Is it making things tight, or unaffordable? Or is it super easy, no big deal? Let's talk about how much she is getting every month in income, what her total monthly expenses are, how much she has left at the end of the month, what she likes to do, what she would like to do, and what her goals are. Then we can really determine whether it makes sense for her. Everybody is so specific. For a lot of people a reverse mortgage does not make sense, and for others it is a lifesaver.

Wrap-up

I have been uploading videos each week on top of the live stream, so if you are not subscribed to the channel, please subscribe. Subscribing also lets you comment and put questions in the chat, so if you are having trouble doing that on YouTube, make sure you are subscribed and logged into the account you subscribed from. If YouTube still gives you trouble, remember I stream on Facebook at the same time, and you can watch and comment there too. And text LIVE to 844-935-3634 if you want to know when I go live, so you do not miss a show.

Short sales take skill, effort, patience, understanding and knowledge — a lot of people all working together diligently and patiently, not expecting things to happen overnight, and willing to wait for a great deal. So with that, I hope you have an amazing rest of your week. Follow the channel so you do not miss the uploads, and I will be back right here Wednesday at 3 p.m. Pacific. Talk to you all real soon.