Key takeaways
- Having little or no equity means the home may sell for about what is owed, or less, which limits the usual options.
- A short sale is a sale where the lender agrees to accept less than the full loan balance. The lender decides, and it may say no.
- Earlier review can leave more time for documentation, approvals and coordination before deadlines narrow the choices.
- Rules and consequences vary by state, lender, investor and loan type. We can walk through your situation with you, explain how files like yours usually move, and coordinate the next steps. For legal and tax questions, a licensed attorney or tax professional should weigh in, and we can work alongside them.
What does it mean to have little or no equity?
Equity is the difference between what your home could sell for and what you owe on it. If the home could sell for more than the mortgage and other liens, you have equity. If it could sell for about what you owe, or less, you have little or no equity. Some people call this being “underwater.”
This matters because a traditional sale has to pay off everything owed at closing. That includes the mortgage, any second mortgage or line of credit, and other liens. It also includes the usual costs of selling. When the sale price can’t cover all of that, the sale can’t close the usual way unless someone agrees to accept less.
Little or no equity is common after a drop in local prices, a loan taken out near the top of the market, a second loan or a period of missed payments. It does not mean you did something wrong. It means the numbers need a different kind of plan.
Why can’t a homeowner with little or no equity just sell?
You can list the home, and sometimes the market price works out. But if the offers come in below what is owed, the sale stalls at the closing table. Lowering the price again usually makes the gap wider, not smaller.
That is often the point where a homeowner hears the words “short sale” for the first time.
What is a short sale?
A short sale is a sale of the home where the lender, and any other lienholders, agree to accept less than the full amount owed so the sale can close. The sale is “short” of the payoff.
A short sale is still a real market sale. The home is usually listed with a real estate agent, a buyer makes an offer, and the lender reviews that offer along with the homeowner’s information. If the lender approves, the sale closes under the terms it set.
Who decides whether a short sale is approved?
The lender, or the company servicing the loan, decides. Behind many loans there is also an investor or a loan program with its own rules. Each of them can say yes, ask for changes or say no. If there is a second mortgage or another lien, that lienholder has to agree too.
Nobody outside the lender can promise an approval, a price or a timeline.
What does the lender usually look at?
Requirements vary, but lenders commonly review:
- The homeowner’s financial situation and the reason for the hardship
- The value of the home, often through their own appraisal or broker opinion
- The purchase offer and the closing figures
- Other liens, judgments or title issues that affect the sale
Missing pages, out-of-date paperwork or numbers that don’t match can slow a review or stop it.
How is a short sale different from foreclosure?
In a foreclosure, the lender takes legal steps to sell the home to recover what is owed. The homeowner usually has little say in how or when that sale happens.
In a short sale, the homeowner stays involved. The home is sold on the market, with an agent and a buyer, and the homeowner takes part in the process with the lender.
How each one affects your credit, any remaining balance and your taxes can vary a lot. We can help you understand how the process works and what to ask. For the legal and tax questions, a licensed attorney or tax professional should answer them for your situation, and we are glad to work with them.
Is a short sale the right option for every homeowner?
No. It is one option, and it is not always the right one. Depending on your goals and your lender, other paths may include:
- Catching up on payments, or a repayment plan
- A loan modification, if you want to keep the home
- A traditional sale, if the numbers turn out to work
- A deed in lieu of foreclosure, where the lender agrees to take the home back
- Legal options you can explore with an attorney
Which options are open depends on your loan, your lender, your state and your timing.
What should a homeowner think about first?
For example, imagine a homeowner who has moved for a new job and can’t carry two housing payments. The home would sell for a little less than the mortgage balance, and there is also a small second loan. Some questions worth asking early:
- Do I want to keep the home, or am I ready to move on?
- How far behind am I, and has a foreclosure sale date been set?
- Are there other liens, judgments or title issues?
- What do I need to ask an attorney or a tax professional, and who can help me organize the file?
This is a hypothetical example, not a real file, and every situation is different.
Why does timing matter?
A foreclosure deadline can change which options are still available. A short sale needs time for a listing, an offer, the lender’s review and closing. Starting earlier can leave more room for the paperwork, approvals and coordination a short sale requires. Starting earlier does not guarantee an approval, and no one can promise that a foreclosure will be stopped or postponed.
If you have received foreclosure notices or have a sale date, reach out to us right away so we can look at your timeline with you, and talk with a licensed attorney about your legal rights and deadlines.
How does KCEREC help homeowners with a short sale?
KCEREC (Keystone Collaborative) works to help homeowners reach the best available outcome. When a short sale may be the right path, our small team coordinates the file with the homeowner, the servicer, the real estate agent, title and the other parties involved, so everyone is working from the same organized information. If listing the home is the right step, we help connect the homeowner with an agent.
We explain the process in plain language and coordinate the file. KCEREC is not a law firm and does not give legal, tax or financial advice, so for those questions we work alongside your attorney or tax professional. Lenders and other lienholders make their own decisions, and they may not agree to a short sale or any other option.
Frequently asked questions
Can I do a short sale if I’m not behind on payments yet?
Some lenders will review a short sale before payments are missed, and others look for a hardship or a missed payment first. It depends on the lender, the investor and the loan type. Ask your servicer or an attorney what applies to your loan, or contact us and we can help you work out what to ask.
Does a short sale stop a foreclosure?
Not by itself. A pending short sale review does not automatically stop or postpone a foreclosure sale, and the rules vary by state and lender. Talk with a licensed attorney about your deadlines.
Will I owe the difference after a short sale?
It depends. Some approvals release the remaining balance and some do not, and state law can affect this. Read the approval terms carefully and ask an attorney before you sign. We can help you understand the terms and the questions to bring.
Are there tax effects from a short sale?
There can be. Forgiven debt may have tax consequences, and the rules can change and depend on your situation. Talk with a tax professional, and we can coordinate with them on the file.
What if there is a second mortgage or another lien?
Every lienholder on the property usually has to agree to release its lien for the sale to close. That adds another party and another decision, which is one reason coordination matters.
Talk with us about your situation
If you owe close to or more than your home is worth and you’re not sure what to do next, reach out. We’ll listen, help you understand your options, and work with the right professionals alongside us for the legal and tax questions.