What Is a Short Sale
What This Means
If you owe more on your mortgage than your home is currently worth, you're considered "underwater." In this situation, selling the home at market value won't generate enough money to pay off the loan.
A short sale allows you to sell the property at its current market value, with the lender agreeing to accept less than the full amount owed. The lender takes a loss, but they avoid the expense and time of foreclosure.
How It Works in New York
The Short Sale Process
The process begins by contacting your lender to discuss your situation. You'll need to demonstrate financial hardship — such as job loss, medical bills, divorce, or a significant drop in income — that makes it impossible to keep up with mortgage payments.
The lender will typically require a hardship letter, financial statements, tax returns, and a listing agreement showing the property is being marketed at fair market value.
Once an offer is received, it must be submitted to the lender for approval. The lender will review the offer and decide whether to accept, counter, or reject it.
Timeline and Lender Approval
Short sales in New York can take 3 to 12 months or longer, largely because of the time required for lender review and approval. Some lenders are faster than others, and having multiple loans (first mortgage, second mortgage, HELOC) can complicate and lengthen the process.
During this time, you may be able to remain in the home, but you should continue communicating with the lender and your real estate professional.
Impact on Your Credit and Taxes
A short sale will negatively impact your credit score, but generally less than a foreclosure. Most homeowners see their credit recover within 2 to 4 years after a short sale.
The forgiven debt (the difference between what you owed and what the lender accepted) may be considered taxable income. However, under certain federal programs and exclusions, you may not owe taxes on the forgiven amount. Consult a tax professional for advice specific to your situation.
Deficiency Judgments in New York
In New York, the lender may have the right to pursue a deficiency judgment — meaning they can come after you for the remaining balance after the short sale. However, many lenders waive this right as part of the short sale agreement.
It's important to get written confirmation from the lender that they will not pursue a deficiency judgment before agreeing to the short sale.
Common Challenges
- Lender approval is required and not guaranteed
- The process can take many months, during which the homeowner is in limbo
- Multiple lienholders can complicate negotiations
- The forgiven debt may have tax implications
- The homeowner's credit score will be negatively affected
Options Available
- Pursue a short sale with lender approval to avoid foreclosure
- Negotiate a loan modification with the lender to make payments more affordable
- Consider a deed-in-lieu of foreclosure if the lender is willing
- Sell the property to a cash buyer who can close quickly if lender approves
- Consult with a HUD-approved housing counselor to explore all available programs
When Selling Might Make Sense
- You owe more than your home is worth and can't keep up with payments
- You've experienced a financial hardship that's not going to improve soon
- You want to avoid the foreclosure process and its more severe credit impact
- You've tried to get a loan modification and been denied
- You need to relocate and can't afford to bring money to closing