Homeowners who fall behind on a mortgage, and who owe more than their house would sell for, often assume foreclosure is the only way the situation can end. It isn’t. In a short sale, the lender agrees to let the homeowner sell the property for less than the outstanding loan balance and accepts the proceeds instead of foreclosing. Handled carefully, that outcome can leave the homeowner in a far stronger position than foreclosure would.
The obstacle is awareness. “Some people don’t even know what a short sale is,” says JD Summa, co-founder of Mr. Short Sale, a company that negotiates short sales with lenders on behalf of homeowners. Summa, who is based in Westchester County, New York, says he co-founded the company in March after seeing a steady stream of foreclosures in the area and finding that many real estate agents didn’t know how to handle them.
A short sale works because the lender stands to lose money either way, and foreclosure often costs it more. Summa describes the typical case: a homeowner owes $100,000 on a property now worth $70,000, perhaps because it has fallen into disrepair. A job loss, an illness, or a divorce pushes the homeowner into default. The homeowner can’t keep up with the payments and can’t sell for enough to pay off the loan, so the lender moves toward foreclosure.
Foreclosure, though, leaves the lender with costs and a property it must carry on its books and eventually sell. “Banks don’t want to do it either,” Summa says. “It costs them a lot of money.” A short sale gives the lender a quicker resolution. The homeowner, or a negotiator acting on the homeowner’s behalf, asks the lender what price it will accept, and the homeowner’s agent finds a buyer at that number. The buyer typically pays less than market value, and the lender collects proceeds without taking the property back.
For the homeowner, the difference between the two outcomes shows up after the house is gone. A completed foreclosure stays on the homeowner’s record and delays the next purchase, and Summa points to a seven-year wait before a former owner can buy again. That figure holds for conventional loans: Fannie Mae generally requires seven years after a foreclosure but four years after a short sale, or two years with documented extenuating circumstances. For borrowers who were behind on payments, FHA loans generally impose a three-year wait after either event, so the advantage is greatest for borrowers who will return to conventional financing.
A short sale also changes how the homeowner leaves. Because the homeowner sells the property rather than losing it at auction, the homeowner has a say in when and how the move happens. “There’s no sheriff knocking on the door,” Summa says. The homeowner, he says, gets to leave with dignity, on their own terms.
A short sale does not automatically erase the gap between what the homeowner owed and what the house sold for, and homeowners need to settle two separate questions about it. The first is whether the lender can still pursue the homeowner for the shortfall. After a foreclosure auction, Summa notes, the homeowner can remain responsible for the difference between the sale price and the loan balance. In a short sale, the homeowner can negotiate for the lender to forgive that remaining balance, and should get the waiver in writing before the sale closes.
The second question is taxes. The IRS generally treats forgiven debt as income, and the federal exclusion that shielded forgiven mortgage debt on a primary home expired at the end of 2025. Unless Congress renews it, debt forgiven in 2026 generally counts as taxable income, with exceptions for agreements put in writing before January 1, 2026, and for homeowners who were insolvent when the lender canceled the debt. Anyone weighing a short sale should run the numbers with a tax professional before agreeing to terms.
If a short sale can leave a homeowner better off, the obvious question is why more distressed owners don’t pursue one. The incentives are not the problem. Summa describes the arrangement as working for all three parties: the homeowner avoids a foreclosure, the buyer gets a property below market value, and the lender avoids taking back a house it doesn’t want. “It’s a win-win for everybody,” he says.
What’s missing is someone who knows how to put the deal together. Many homeowners have never heard of a short sale, and Summa found that many agents in his area didn’t know how to handle short sales or bank-owned properties either. The process requires negotiating a price with the lender and then finding a buyer at that price, and an agent unfamiliar with it may never raise it. For a homeowner facing default, that means the option often has to start with the homeowner: asking the lender about a short sale, and finding an agent or negotiator who has handled one before.
About the Expert: JD Summa is co-founder of Mr. Short Sale, a US-based company that negotiates short sales with lenders on behalf of homeowners, and co-founder of Kings Capital Construction Group, Inc., a site work and real estate development company based in Westchester County, New York.
This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
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