SHORT SALES
Frequently Asked Questions
(Updated as of September 2019)
This factsheet is provided for information purposes only. It is not a substitute for advice from
legal, accounting, housing, or real estate professionals. Please seek professional advice for
information specific to your situation.** (Note: The term “lender” has been used through this
factsheet. It should be understood that you may be negotiating with a bank, lender, or servicer.)
SHORT SALE BASICS
Q: What is a short sale?
A: A short sale is a real estate transaction in which you sell your house and your mortgage lender
agrees to accept a price less than what you owe on your mortgage. In other words, your mortgage
is “upside down” or “underwater” and your house cannot be sold for what you owe.
Q: What are the benefits of a short sale?
A: You have more control over when you leave your house, and the lender usually receives more
money through a short sale than a foreclosure or “REO” (post-foreclosure) sale. The difference
between what you owe and the amount of money the lender receives from the sale can be, but is
not automatically, forgiven.
Q: What are the potential pitfalls of a short sale?
A: After a short sale, you may still owe the lender the difference between your loan balance and
the proceeds from the sale. If part of your agreement is for the lender to write off any remaining
balance, you need to get this commitment in writing. Also, though you are avoiding a
foreclosure, a short sale will have nearly the same negative effect on your credit score as a
foreclosure because in both cases, only part of the debt was paid.
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A future mortgage lender,
however, may treat a prior short sale more favorably than a prior foreclosure when evaluating
you for a new mortgage loan in the near future.
Q: How does a short sale work?
A: It works like other house sales, except that obtaining your lender’s approval of the sale price
makes the process longer than in a normal sale. Generally, a lender will not consider a short sale
until you have found a buyer for your house and signed a contract of sale. You must also prove
that you have suffered an economic or financial hardship which makes you unable to afford your
**The Connecticut Fair Housing Center does not provide short sale assistance, but encourages
homeowners interested in a short sale to work with experienced local real estate agents,
attorneys, and housing counselors.
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See https://www.myfico.com/credit-education for more.
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mortgage payments or cover the difference between the value of your house and what you owe.
You should work with a local real estate agent experienced in short sales who will value, list, and
market the house for you. You should also hire a local attorney experienced in real estate
transactions and short sales. Both the agent and the attorney can negotiate with the lender and
assist you with the required paperwork.
Q: How long does the short sale process take?
A: The process usually takes months longer than a normal real estate sale because your lender
must review your financial paperwork and approve the sale price. However, if you work closely
with a knowledgeable real estate agent, it can take as little as three months. As every lender has
different procedures, a good real estate agent will confirm your lender’s process, including the
required paperwork. He or she should know your neighborhood and how to price your house.
FEES, DEFICIENCIES, AND TAXES
Q: What will it cost me to sell my house in a short sale?
A: You might not pay any fees out-of-pocket in a short sale, and all the fees may be paid from
the proceeds of the sale. In order for this to happen, all fees, including closing costs, legal fees,
and real estate agent commissions, must be approved by the lender. Your agent or attorney may
submit a Preliminary HUD-1 Settlement Statement to the lender so that the lender can review
and either approve or revise the fees. Your real estate agent should make sure that all agents
involved in the sale agree to accept the commission the lender approves and that they understand
that you will not make up the difference if the lender is not willing to pay the proposed fees.
Q: Will I owe the bank money after completing a short sale on my house?
A: It depends. The amount owed by you or “deficiency” will be the difference between the total
balance owed to the lender and the amount the lender receives from the short sale, provided that
the amount received is less than the amount owed. In many situations, the lender will forgive the
deficiency due to your hardship and the difficulty of recovering the funds from you. You must,
however, obtain the lender’s written approval to forgive the deficiency.
Q: Will the lender request a deficiency judgment?
A: Legally, without an agreement to forgive any deficiency, the lender may be entitled to a
“deficiency judgment,” which is a legal claim by the lender for the remaining amount owed
following a sale. You should work closely with your attorney to determine whether the lender
will seek a deficiency judgment.
Q: If my lender forgives a portion of my mortgage balance, will I have to pay taxes?
A: You may be taxed on forgiven debt as if the forgiven amount was income. You should work
with an attorney or tax accountant to determine whether you qualify for an exception to taxation
under the Mortgage Forgiveness Debt Relief Act of 2007 (which has often been temporarily
extended by Congress), or whether you are “insolvent” and not subject to taxation on the
forgiven amount. Furthermore, if you are in foreclosure and especially if you have legal defenses
in the foreclosure, your attorney may be able to negotiate with the lender to treat the forgiveness
as non-taxable.
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FACILITATING A SHORT SALE
Q: When is the best time to start the short sale process?
A: As soon as you realize you are unable to make your mortgage payments, you should consider
all your options, such as a loan modification. See “Resources for Homeowners at Risk of
Foreclosure” at the end of this factsheet for ways to learn about your options. If, after taking a
hard look at your finances, you determine that you may need to sell your house to avoid
foreclosure, you should immediately begin the process. The further into the foreclosure process
you go, the more your lender will have spent on the foreclosure process and the less likely it may
be to consider a short sale.
Q: What documents are necessary to proceed with a short sale?
A: The specific documents necessary to approve a short sale will depend on the lender.
However, the lender will typically require:
• An authorization from you so that the lender can discuss the sale directly with your real
estate agent and attorney.
• A hardship letter describing the circumstances leading to your mortgage problems.
• The listing agreement with your real estate agent.
• A signed, valid contract for the purchase of your real estate between you and the buyer.
• A preliminary HUD-1 Settlement Statement for the short sale, which indicates the
contract sales price and all associated costs of the sale (including real estate commissions,
if any), unpaid loan balances, and unpaid fees. The “bottom line” will provide a
preliminary estimate of proceeds to the lender.
• An independent appraisal of the house that the lender will arrange.
• If any repairs are needed, a repair cost estimate, and photos of any areas that need repair.
• Copy of property tax statement, a statement of any judgments or liens on the property, the
deed, divorce decrees, and bankruptcy petitions, discharges, or dismissals.
• Detailed information on your financial condition, including tax returns, payment stubs,
bank statements, and a monthly budget worksheet (on the lender’s forms).
Q: Do foreclosure proceedings stop while I attempt to work out a short sale?
A: Not necessarily. Generally, foreclosure proceedings do not stop until, at a minimum, you have
submitted a request for short sale approval to your lender. You can use Connecticut’s
Foreclosure Mediation Program to ensure you have time to do a short sale – hundreds of
Connecticut homeowners have already done this. In mediation and court, you should be ready to
show proof that you are working to move the short sale along as quickly as possible. If you are
pursuing a short sale while under threat of foreclosure, you should begin the process as soon as
possible and employ a real estate agent that has the experience and knowledge to successfully
complete the transaction. You should keep your agent and attorney informed of any new legal
papers you receive or any information you receive from your lender or through mediation that
may affect your property.
Q: What if there is more than one mortgage on my house?
A: Short sales are difficult transactions and they are more difficult to obtain when there are two
loans involved – especially if the loans are with two different lenders. However, your real estate
agent or attorney may be able to get both lenders to cooperate on a short sale solution. Typically,
the first lender will offer the second lender a small amount to agree to the short sale. It will be up
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to your real estate agent and attorney to work closely with all parties to negotiate a solution. If
there are problems with the second mortgage or junior lienholder, your attorney may also be able
to work with the lender’s attorney to obtain a “judgment of loss mitigation.”
ENTERING THE RENTAL MARKET AFTER FORECLOSURE?
If you are looking for housing because you are considering a short sale, you should be aware of
your rights under the fair housing laws. These laws make it illegal to discriminate based on:
race, color, national origin, sex, religion, familial status, disability status, marital status,
sexual orientation, age, lawful source of income, gender identity, or gender expression.
If you suspect that one of these characteristics has played any role in the way you are treated in
the housing market, call the Connecticut Fair Housing Center at (860) 247-4400.
Q: Can an owner refuse to rent to me because I lost my house to foreclosure?
A: An owner can refuse to rent to people who have bad credit. A foreclosure is considered bad
credit regardless of the reason you fell behind. An owner can violate the law, however, if she
only turns down people in the protected groups who have bad credit. For example, it is illegal for
an owner to only reject African-Americans or Latinos with bad credit while accepting White
people with similar credit histories.
Q: Can an owner charge me a higher security deposit because I lost my house to
foreclosure?
A: No. The law says that an owner can charge a security deposit equal to two months’ rent plus
first month’s rent. If the renter is 62 or older, an owner can only charge one month’s rent plus
first month’s rent. For more information, go to: http://ctlawhelp.org/tenants-rights-security-
deposits.
Q: What if I or someone who lives with me has a disability?
A: An owner cannot refuse to rent to you because you or someone who will live with you has a
disability. In addition, an owner must make “reasonable accommodations” for people with
disabilities to provide them equal access to housing. If a medical professional recommends
something that is “against the rules” you can ask for a change or exception to that rule by
requesting a reasonable accommodation. For example:
• Waiving a “no pet” policy because you need a service or companion animal;
• Giving you a first floor apartment or an assigned parking space because your arthritis
makes it hard for you to walk; or
• Allowing you to have a live-in aide to help you with chores.
Landlords are also required to permit people with disabilities to make alterations to their homes
as “reasonable modifications.” For example, an owner must allow a tenant who uses a
wheelchair to install a ramp. But, unless the owner receives government funding, the tenant is
generally responsible for the cost of the modification, and the modification must be done to code.
These are just a few of the many types of reasonable accommodations and modifications that can
be requested. Call the Connecticut Fair Housing Center at (860) 247-4400 to learn more.
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Q: What does illegal discrimination look like?
A: It could be statements like:
• “No kids.”
• “You must have a job to live here.”
• “No kids under six because there is lead paint in the apartment.”
• “I don’t rent to people who are disabled.”
• “Boys and girls cannot share a bedroom.”
• “Families with kids can’t live in this building.”
• An ad that reads, “Perfect for working adults.”
If an owner/agent says or does anything like this, call the Connecticut Fair Housing Center at
(860) 247-4400.
Q: What behavior is illegal under the fair housing laws?
A: Illegal behavior includes:
• Refusing to rent based on race, national origin, or any of the protected groups bolded on
the previous page;
• Having rules that only apply to people in the protected groups and no one else;
• Steering people based upon their membership in a protected group; and
• Advertising in a way that keeps people in the protected groups out.
Q: What should I do when looking for an apartment?
A: Here are five things you can do:
1. Keep a log of where you call and visit. When looking for an apartment, keep a log that
includes the phone number you called, the date you called, the person you talked to, the
address of the apartment, the information you receive, and what you discuss.
2. Ask for an application. Always ask for an application. Ask if the owner has anything in
writing about who qualifies for an apartment. If the owner doesn’t use applications, ask
what the next steps are for applying for an apartment.
3. Never lie. If you are asked about your credit, do not lie. Do not lie on the application
about anything, big or small.
4. Fill out the application completely. If there is a question about which you’re unsure, let
the owner know you need some time to complete the application. Do not just leave the
answer blank.
5. Follow-up. Once you have filled out an application, call the owner back to follow-up. If
you are turned down, ask why.
Q: What should I do if I suspect discrimination?
A: Call the Connecticut Fair Housing Center at (860) 247-4400 as soon as possible.
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OTHER ALTERNATIVES
Q: What about companies that offer to buy my house and sell it back to me later at a
discount? Or what about companies that offer to buy my house, rent it back to me, and let
me buy it back over time?
A: Unfortunately, most of these offers are scams designed for the company to obtain your house
at a discount while defrauding your lender. State banking law makes most of these scams illegal
and provides civil penalties for violators. You may call the Department of Banking at (877) 472-
8313 for more information.
Q: I have been contacted by someone who offered to buy my house for cash at a significant
discount and to negotiate with my lender for free. Is this a good deal?
A: No. Most of these companies are either trying to defraud your lender into thinking the
property is worth far less than it actually is or they are hoping the lender will accept a low-ball
offer. Typically, your lender does not care if the transaction is an “all cash” offer.
RESOURCES FOR HOMEOWNERS AT RISK OF FORECLOSURE
• The State of Connecticut Department of Banking’s toll-free Mortgage Foreclosure
Assistance Hotline: (877) 472-8313.
• Connecticut Fair Housing Center’s manual “Representing Yourself in Foreclosure: A
Guide for Connecticut Homeowners” via the Center’s website at www.ctfairhousing.org.
• HUD/CHFA-approved Housing Counselors – listed on pp. 37-38 of the Connecticut Fair
Housing Center’s manual and through www.chfa.org.
• Connecticut Fair Housing Center’s free foreclosure prevention clinics. Information is
available at www.ctfairhousing.org.
• Experienced local consumer attorneys and consumer bankruptcy attorneys: available via
www.naca.net (National Association of Consumer Advocates), www.nacba.org (National
Association of Consumer Bankruptcy Attorneys), www.ctbar.org (Connecticut Bar
Association), or your county’s bar association.
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This chart is for homeowners who have decided to explore the sale of their house. It lists some of
the differences between selling your house and going through a foreclosure.
Again, you may have options that allow you to keep your house, such as a loan modification, or
other options, such as a deed-in-lieu of foreclosure or bankruptcy, which may be appropriate to
your situation. You should consult a housing counselor or an attorney.
Conventional Sale
Foreclosure
Description
Your house is worth
more than the amount
owed on the mortgage.
In other words, you
have equity in your
house.
You and the buyer
agree to the terms of
the sale.
Legal process which occurs when
you do not make payments on the
loan.
The mortgaged property is sold by
the lender to pay back your loan.
You must leave the property.
Cash
Position
You receive the net
proceeds, if any, after
the costs and fees to
sell the house, and any
unpaid loan balances
and fees are paid.
Your lender may offer you a
“cash for keys” payment in
exchange for you leaving the
house in good condition.
You should obtain advice about
possible deficiency judgments.
You may need to go to court to
claim proceeds from a sale.
Real Estate
Commission
You and the buyer
negotiate who pays
and how much the real
estate agents are paid
(typically a percentage
of the sale price).
N/A
Impact on
Your Credit
The sale itself has
little impact, if any.
Similar to a short sale (see the box
to the left).
Comments:
Success partly
depends on the
strength of the real
estate market in your
area.
If available, this is the
best option.
Typically, an uncontested
foreclosure can take 3-4 months to
complete. However, it depends on
the court, your participation, the
lender, and the lender’s attorney.
This option is typically a last
resort.