By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.
A California short sale runs in five stages: the owner lists the home, accepts a buyer’s offer, sends the lender a hardship package, waits for the lender’s written approval, and closes before the approval expires.
Every lender with a lien on the home has to agree. For a home with one to four units, a short sale approved in writing leaves the owner owing no deficiency on that loan under California law. Taxes are another matter, and the federal break that covered most forgiven mortgage debt on a main home ended for debt forgiven after 2025.
Step 1: Decide whether a short sale fits
A short sale is for an owner who owes more than the home is worth and can’t keep paying. Before listing, check the alternatives with your servicer and a free HUD-approved housing counselor, which the CFPB lists along with the HOPE Hotline, (888) 995-4673. If you’re already in foreclosure, see where you are in the California foreclosure timeline; a sale date doesn’t rule out a short sale, but it shortens the time available.
Step 2: List the home and price it to be approved
The listing agent sets a price the lender’s own valuation is likely to support, then markets the home and explains to buyers that the sale needs approval. Overpricing wastes time: the lender will compare any offer with its broker price opinion or appraisal, and a price far above that just delays a sale. The listing should disclose that it’s a short sale subject to lender approval.
Step 3: Accept an offer and submit the package
The owner accepts an offer “subject to lender approval.” The agent then sends each lienholder a package that typically includes:
- The signed purchase contract and the buyer’s preapproval or proof of funds
- A hardship letter explaining why the owner can’t continue paying
- The lender’s financial forms, recent pay stubs, bank statements and tax returns
- An authorization letter so the lender can talk to the agent
- An estimated settlement statement showing what each party receives
- The listing agreement and any comparable sales the agent wants the lender to see
Incomplete files are the most common cause of delay. Submit everything the first time and keep copies of what was sent and when.
Step 4: Lender review and approval
The lender assigns a negotiator, orders a valuation and reviews the owner’s finances. It may accept the offer, counter with a higher price, ask the owner for a contribution, or decline. Second mortgages, home equity lines and HOA liens each have to agree too, usually in exchange for a payment from the first lender’s proceeds. Our notes on short sale negotiation cover how those conversations work.
The result is an approval letter. Read it closely: it states the approved price and net proceeds, the closing deadline, any conditions, and how the remaining balance is treated.
Step 5: Close before the approval expires
The buyer completes inspections and financing, and escrow closes within the approval’s deadline. If the deadline will be missed, ask the lender for an extension in writing before it passes.
How long does a California short sale take?
The listing and offer stages take about as long as any sale. The lender review is the variable: commonly several weeks to a few months, and longer with multiple liens or an incomplete file. Starting before a sale date is set gives the owner the most room.
| Stage | What drives the timing |
|---|---|
| Listing to accepted offer | Price, condition and buyer demand |
| Package submitted to decision | Lender workload, completeness of the file, valuation, number of liens |
| Approval to closing | The approval deadline, the buyer’s financing and inspections |
Does a short sale stop the foreclosure?
No. The foreclosure continues until the lender postpones it. Many lenders will postpone a sale for a short sale that’s moving, but they aren’t required to. Keep the foreclosure department informed, ask for postponements in writing, and know your dates. Under the steps in the California Courts self-help guide, the notice of sale sets the auction at least 21 days out.
Will you owe money after a short sale?
On a home of one to four units, Code of Civil Procedure §580e provides that no deficiency is owed or collected once the lender consents to the short sale in writing and receives the agreed proceeds. The lender can’t require more money as a condition of consent, and the protection can’t be waived. It doesn’t cover borrowers that are corporations, LLCs or limited partnerships, and it doesn’t protect against claims for fraud or for damage to the property. Read the approval letter carefully, and have an attorney review it if anything in it suggests you’ll owe more.
Short sales and taxes after 2025
For years, most mortgage debt forgiven on a main home was excluded from federal income. That exclusion doesn’t apply to debt discharged, or discharge agreements entered into, after December 31, 2025, according to IRS Publication 4681. Other rules may still help, such as the insolvency exclusion, and the treatment depends on whether the loan was recourse or nonrecourse. If the lender issues a Form 1099-C, don’t ignore it. Ask a tax adviser before you sign the approval, because the answer can change whether a short sale is your best option.
Short sale vs foreclosure for the owner
- Control: a short sale lets you plan the move; foreclosure doesn’t.
- Deficiency: both are generally protected for the first loan in California, by §580e for an approved short sale and by §580d after a nonjudicial foreclosure. Junior loans can differ.
- Effort: a short sale needs documents, showings and patience.
- Credit and future borrowing: both affect credit; waiting periods for a new mortgage vary by loan program. Ask a housing counselor or lender for current rules.
The comparison from a buyer’s side is in REO vs short sale.
For buyers of short sales
Expect to wait, keep your financing current, and don’t schedule a move around a closing date until the approval arrives. You can usually do inspections while waiting, but think about the cost if the lender declines. Investors should read investing in short sales, which covers arm’s-length requirements and the risks particular to investor buyers.
Questions owners ask
Do I have to be behind on payments to do a short sale?
Not always. Some lenders consider short sales for owners facing a documented hardship before they miss payments. Ask your servicer.
Who pays the real estate commission?
It’s usually paid from the sale proceeds as part of the lender’s approval. The lender decides what it will allow.
Can I stay in the home during the short sale?
Yes, until closing, as long as you cooperate with showings. Your agreement with the buyer sets the move-out date.
What if my lender says no?
Ask why. A higher offer, more documents or a different valuation may change the answer. If not, the other options, from a deed in lieu to a loan modification, may still be available.
Want help with a short sale? See our short sale listing services or contact us confidentially. The full library is in the REO and short sale sellers’ guide.
Sources & notes
- CFPB: what is a short sale?; California Courts Self-Help Guide
- Code of Civil Procedure §580e; IRS Publication 4681 (2025)
This is general information, not legal or tax advice. Last reviewed October 2026 by Matthew Martinez.
