What a short sale is
The CFPB defines a short sale as a sale of your home for less than you owe on your mortgage. It is a way to avoid foreclosure, it needs your servicer's approval, and you have to find the buyer and move out. If the servicer approves, it agrees to accept the sale money as payoff, even if that is less than the balance.
It differs from a normal sale, where your payoff is paid in full from the proceeds (see selling a house with a mortgage). In a short sale, the lender takes a loss and so controls the timing, the price and the terms.
How the lender approval process usually works
Every lender has its own forms. The usual steps are below. We could not find an official source that sets how long approval takes, so ask your servicer for its timeline and do not count on a closing date until you have the approval letter.
- Talk to a counselor first. HUD-approved counselors and the HOPE Hotline are free. They can tell you whether a loan modification or other help fits better. Call 888-995-4673.
- Contact the servicer's loss mitigation department. Ask for its short sale package. It usually asks for a hardship letter, income and bank statements, and tax returns.
- List the house with an agent who has handled short sales. The listing price should be near market value, because the lender will check it against its own valuation.
- Get an offer and send it to the lender. The purchase and sale agreement should say it depends on lender approval. If you have a second mortgage or other liens, those lienholders usually must also agree to release.
- Review the approval letter line by line. It should state the price, what the lender will net, and what happens to any remaining balance on your loan.
- Close and record. The lender is paid from the sale and records a discharge, as in any payoff (MGL c.183 s.55 gives it 45 days).
Massachusetts also regulates businesses that sell foreclosure-related services (940 CMR 25, listed on Mass.gov). Do not pay an upfront fee to anyone who promises to get you out of a mortgage.
Deficiency in Massachusetts: get a waiver in writing
The "deficiency" is the part of your loan the sale does not pay. In some states, you can still owe it. The CFPB says that, before you finish a short sale, you should ask your lender to waive the deficiency and "get the waiver in writing and keep it for your records," to protect yourself from a later lawsuit.
Massachusetts law allows a lender to bring an action for a deficiency after a foreclosure sale if it sent the required notice at least 21 days before the sale, with a warning of liability for the deficiency (MGL c.244 s.17B). A short sale is a negotiated deal instead, so what you owe afterwards depends on the lender's approval letter. If the letter does not say the debt is released in full, ask for it to be added. Have an attorney read it before you sign.
Tax on forgiven debt: Form 1099-C and Form 982
According to the IRS, when a lender cancels part of a debt, the canceled amount is usually taxable income in the year of cancellation. The lender reports it on Form 1099-C, but you are still responsible for reporting the right amount.
Exclusions. The IRS lists several, including bankruptcy, insolvency and qualified principal residence indebtedness. You claim them on Form 982 with your tax return.
- Insolvency. You were insolvent if your debts were more than the fair market value of all your assets right before the discharge. The exclusion is limited to the amount you were insolvent.
- Qualified principal residence indebtedness (the Mortgage Forgiveness Debt Relief Act exclusion). It covers up to $750,000 ($375,000 if married filing separately) of debt used to buy, build or substantially improve your main home. The IRS says it applies to debt discharged before January 1, 2026, or under a written arrangement made before January 1, 2026. As of October 2026, IRS Topic 431 still says this, so a short sale approved after 2025 under a new agreement generally does not qualify. Congress has extended this exclusion before, so check IRS.gov or ask your CPA before you file.
Also, a loss on the sale of your main home is not deductible (IRS Pub. 523), and the IRS treats recourse and nonrecourse debt differently in a sale or foreclosure (Topic 432). That is why a CPA should look at your numbers before you sign. If the exclusions do not apply, plan for tax on the forgiven amount.
Credit and buying again
A short sale will hurt your credit. We could not find an official score range, so ask your lender how it will report the account. For a later mortgage, Fannie Mae's guide lists a waiting period of 4 years after a pre-foreclosure sale or deed in lieu, or 2 years with documented extenuating circumstances, versus 7 years after a foreclosure (3 years with extenuating circumstances). Other loan programs have their own rules.
Alternatives to a short sale
| Option | What it is | Watch for |
|---|---|---|
| Loan modification or repayment plan | Change the loan terms so you can keep the house | Ask in writing; the Division of Banks cannot force a lender to modify |
| Right to cure | Massachusetts lenders must send a 90-day right to cure notice before starting foreclosure on most home loans | Use the time to work out a plan |
| Deed in lieu of foreclosure | You give the house to the lender and the lender cancels the debt | Get the deficiency waiver in writing; there can be tax too (CFPB) |
| Sell normally | If a buyer pays enough to cover the loan and costs | Compare listing and cash offers in the comparison tool |
| State help | RAFT can give up to $7,000 per 12 months for housing costs including mortgage payments, if income is under 50% of area median | The Mass HAF homeowner program is closed (Mass.gov) |
Mass.gov lists the Attorney General's HomeCorps hotline and the Division of Banks' imminent foreclosure help; the Division of Banks will, at your request, ask for a 60-day delay of an auction that is within 7 business days, if you have never asked for a stay and it is your primary residence. Mass.gov calls this a last resort with no guarantee. See Mass.gov on avoiding foreclosure and our page on behind on mortgage payments.
General information, not legal or tax advice. A short sale has legal and tax effects that depend on your loan and your finances. Talk to a housing counselor, an attorney and a CPA before you sign.