What Are Short Sale Laws?

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  • Written By: Marlene Garcia
  • Edited By: Daniel Lindley
  • Last Modified Date: 05 February 2020
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Short sale laws govern the process of selling a property for less than its outstanding mortgage to protect struggling homeowners from foreclosure. These short sale laws regulate timelines for lender approval of a short sale and tax implications for the debtor. They also provide rules for lenders on second mortgages to speed up the process of a short sale.

Short sale law prohibits a mortgage lender from foreclosure proceedings after a sale has been approved and is in process. This allows the homeowner to avoid losing his or her home at a public auction while attempting to sell the property. This short sale law went into effect in 2010 to address economic conditions that led to many homeowners facing foreclosure.

The amended short sale law also defines time limits for lenders to approve or deny a request for forgiveness of debt. It extends the amount of time for homeowners to find a buyer and limits the period of time for a mortgage company to respond to an offer. Once the lender approves the sale, the bank or mortgage company cannot later try to recoup any part of the unpaid balance from the seller.


Short sale laws address money owed on second mortgages to provide an incentive for cooperation. Before the 2010 law went into effect, the holder of a second or third mortgage could block a short sale by refusing to sign off on the deed. Changes in short sale law set monetary amounts paid to second trust deed holders. In some regions, these lenders may still sue to recover a debt.

Other short sale law addresses tax implications for the financially distressed homeowner. The Mortgage Forgiveness Debt Relief Act of 2007 exempts a property owner from claiming debt relief as taxable income. Before this law, citizens were required to claim as gross income the difference between what they owed on a home and what the mortgage company accepted via a short sale.

These laws apply to areas with declining home values or financial hardships owners face due to medical expense, job loss, or divorce. A homeowner might be required to prove the hardship through salary records and bank statements. The law only applies to a person’s primary residence.

Short sale laws address properties subject to foreclosure. They aim to protect a taxpayer’s credit rating when financial difficulties arise. A short sale represents a negotiated agreement between the lender and the property owner to sell the home for less than the balance owed. The mortgage lender writes off the difference after setting an agreed-upon sales price.

This method of selling a home aims to prevent neighborhood blight that may be caused if many homeowners abandon property they cannot afford to keep. The lender avoids the expense of foreclosure and the prospect of trying to sell a home in an area of even steeper declining values. A property owner avoids the stigma of foreclosure on his or her credit record or filing for bankruptcy protection.


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