The Short Sale Process: 5 Steps to Break Free of Mortgage Trouble for Good

The short sale process can seem intimidating, yet getting a handle on the steps can make it a lot less scary—and help home sellers navigate a difficult financial situation without too much damage.

A short sale—where homeowners sell their property for less than they owe on their mortgage is often the last resort for people who can't pay their mortgage and are facing foreclosure, explains Rachel Ivers, a junior agent at The Blake Team at Keller Williams in Aurora, CO.

So how does the short sale process work? Here are the steps involved, and what happens after the short sale is complete.

1. Consider a loan modification first

Before you assume you must have a short sale, talk to your lender or housing counselor about your situation. You may be able to get a loan modification and avoid having to sell your home, says Michele Lerner, author of "Homebuying: Tough Times, First Time, Any Time."

The federal Home Affordable Modification Program, a project run by the U.S. Department of Housing and Urban Development, may be an option. If you're eligible for HAMP, your mortgage company will likely put you on a three-month trial plan, giving you time to show you can make timely payments at a new monthly payment level. If you make it through the trial, you may have a new mortgage payment and avoid moving ahead with a short sale.

If loan modification is not an option, the next step is to move forward with a short sale.

2. Talk to your lender about a short sale

Since a short sale means you're trying to sell your house for less than you owe on your mortgage, your lender will have to sign off on it. But first, the lender is going to need proof that the short sale must happen, says real estate agent Lisa Blake, also of The Blake Team at Keller Williams. 

"The sellers must submit a short sale packet, which includes hardship papers," Blake says. "Hardship papers show the bank that the seller is, in fact, undergoing financial hardship."

That paperwork may include bank statements and account information, income statements such as pay stubs, copies of bills and various expenses, asset disclosures, and more.

3. Contact a real estate agent

Of course, you'll need a real estate agent to sell your property—and since short sales are complex, you'll want an agent with experience in the short sale process to handle the deal.

You can search for agents in your area with certain expertise on realtor.com®'s Find a Realtor tool. Keep an eye out for someone who has become a Certified Distressed Property Expert, which means the pro has completed coursework related to short sales and foreclosures.

Once you reach out, the agent will then review your financial situation, as well as the home's estimated value, to come up with a listing price.

4. List your property

This is one step in the short sale process that is like any other property sale—the home in question is listed by your real estate agent, who will try to find a buyer and get the home under contract.

Once you have an offer from a buyer, this will need to be submitted to your lender for review. Further negotiations may be required between your agent, the buyer's agent, and the lender until a settlement is reached.

If your lender has opted to approve your short sale under the U.S. Treasury’s Home Affordable Foreclosure Alternatives program, this will all be done in about four months. If you didn't qualify for HAFA, the process can take longer.

5. Close the deal

If your lender approves your buyer, all is good. You move out. The buyer moves in. The funds used to purchase the house will go to your lender, and your mortgage debt will be forgiven. If you qualified for HAFA, you will also walk away with $3,000 in moving expenses. If you didn't, you simply walk away without that mortgage debt on your shoulders.

After a short sale, how long before I can buy a new home?

Granted, there are repercussions to selling your home in a short sale. The IRS will treat your forgiven mortgage debt as taxable income, so you may still end up owing money to Uncle Sam in the form of income tax. And your credit score could take a hit, since you're not paying the full debt you agreed to pay when you took out the mortgage.

Yet short sales have a few advantages, too. Not only will they get a seller out from under the threat of foreclosure and out of debt, but they also allow you to stay in your home during the selling process, says Sarah Naylor, an agent with the Patty Turner Group in Rockwall, TX.

Typically you can apply for a conventional loan within four years of a short sale. This may seem long, but it's far better than foreclosure, where lenders tend to expect you to wait seven years.

"A short sale does look better in the bank's eyes than a foreclosure," Naylor adds. "The bank appreciates that you came to them with your inability to pay as opposed to just leaving your home."

By: Jeanne Sager