Underwater on a Downriver Home? How a Short Sale Works
What is a short sale?
A short sale is a sale for less than you owe on your mortgage. The CFPB calls it a type of loss mitigation and an alternative to foreclosure. The catch is in its own description: you’ll still have to leave the home, and the sale only pays off the mortgage if your lender or servicer agrees to accept less than the full balance.
That’s the difference from a normal sale. When a Downriver home is worth more than the mortgage, the title company orders a payoff, the sale covers it, and you keep what’s left. Our guide to the mortgage payoff statement walks through that process. When the home is worth less than the payoff plus your selling costs, the numbers don’t close without someone giving something up. In a short sale, that someone is the lender, and it gets to decide whether to agree.
How do you know if you’re underwater?
Put three numbers side by side:
- What you owe. Ask the servicer for a payoff figure, not the balance on your last statement. Interest, fees and any missed payments can make the payoff higher.
- What the home would realistically sell for. Ask your agent for a pricing opinion based on recent sales near you. Our Downriver pricing strategy guide explains how that number gets built.
- What comes out of any sale. Commission, title charges, transfer tax and any unpaid property taxes all come out of the sale price. Our Riverview net proceeds guide shows how sellers work through those costs.
If the realistic price covers the payoff and the costs, you aren’t looking at a short sale. You’re looking at a regular sale, maybe a tight one. If it doesn’t, keep reading.
Don’t forget anything else recorded against the house, like a second mortgage or a home equity line. Ask the title company early what has to be paid or released for the buyer to get clear title. Our post on what the title company does in a Michigan sale explains its role. If you’re behind on property taxes too, our guide for Downriver sellers behind on property taxes covers the Wayne County deadlines.
How does a short sale work with the servicer?
It starts with the servicer, the company you send your payments to, not with a listing. A short sale is one of the loss mitigation options a servicer may or may not offer for your loan, so the first step is asking what’s available and applying.
The federal rule for mortgage servicers, 12 CFR 1024.41, sets out how that application gets handled. Here’s what the January 1, 2024 edition of the rule says:
| Step | What the rule says |
|---|---|
| You send an application 45 days or more before a foreclosure sale | The servicer reviews it promptly and, within 5 days (not counting weekends and legal holidays), tells you in writing that it got it and whether it’s complete |
| Your application is complete more than 37 days before a foreclosure sale | Within 30 days, the servicer evaluates you for all the loss mitigation options available to you and tells you in writing what it will offer, if anything |
| Foreclosure has started, but your complete application arrives more than 37 days before the sale | The servicer generally can’t move for a foreclosure judgment or hold the sale while the application is being decided |
The CFPB’s own guidance says the same thing in plainer words: make sure your servicer receives your complete application more than 37 days before a scheduled foreclosure sale. It also says the servicer can’t start the foreclosure process until at least 120 days after you become delinquent, except in rare cases.
“Complete” is the word that matters. The rule defines a complete application as one where the servicer has all the information it requires from you. Ask for the list, send everything it asks for quickly, and keep copies of what you sent and when. The rule has exceptions and details this table leaves out, so if a sale date is already on the calendar, talk to a housing counselor or an attorney right away.
What should you get in writing before you sign?
Two things, before you accept a buyer’s offer or sign any agreement with the servicer.
The deficiency waiver
The deficiency is the gap between what you owe and what the sale brings in. The CFPB says that in some states you may still be responsible for it after a short sale, and some lenders could sue to collect it. Its advice is to ask the lender to waive the deficiency before the sale, get the waiver in writing and keep it.
Don’t assume foreclosure is a cleaner way out on this point. Michigan’s foreclosure-by-advertisement law, MCL 600.3280, describes a lender that bought the home at its own foreclosure sale suing the borrower for a deficiency, and lets the borrower defend by showing the home was worth the debt or the bid was well below its true value. Whether a lender can or will pursue you depends on your loan and your facts, so that’s a question for an attorney, not a listing agent.
Moving help
The CFPB also suggests asking about help with moving costs, sometimes called “cash-for-keys.” It may not be offered, but you won’t know unless you ask, and the time to ask is before the terms are settled.
Can the forgiven debt be taxed?
It can, so ask about taxes before you agree to anything.
The IRS says canceled debt is generally taxable unless an exclusion applies, and a creditor may send you a Form 1099-C showing the amount canceled. The exclusion people used to count on for a home, the one for qualified principal residence indebtedness, only covers debt discharged before January 1, 2026, or discharged under an arrangement entered into and evidenced in writing before that date. That cutoff comes from IRS Topic 431, so check the current version of that page with your tax professional, since Congress can change it. A short sale agreed to and closed now may not qualify.
Other exclusions on the IRS list may still apply, including debt canceled in a bankruptcy case and debt canceled to the extent you’re insolvent. The IRS also explains that the tax result depends on whether the debt was recourse or nonrecourse. Those calls depend on your full financial picture, so bring the 1099-C, your closing statement and your loan papers to a tax professional before you file.
What’s the clock if foreclosure has already started?
Michigan lets a mortgage be foreclosed by advertisement, outside of court, and the statutes for that process give you a sense of the timeline.
- The notice. MCL 600.3208 requires the notice of the foreclosure sale to be published once a week for 4 successive weeks in a newspaper in the county, and a copy to be posted in a conspicuous place on the property within 15 days after the first publication.
- The sale. Ask the servicer for the scheduled sale date in writing. That’s the date the 37-day application deadline counts back from.
- Redemption after the sale. MCL 600.3240 gives a redemption period after the sale. For a residential property of 4 units or fewer, it’s 6 months if the amount claimed due when the foreclosure notice went out is more than two-thirds of the original loan, and generally 1 year if it isn’t. It can be much shorter if the property is treated as abandoned under the statute.
Those are statewide rules, so they apply in Wayne and Monroe counties alike. Your notice and the servicer’s letters will have the actual dates. If you’re reading this with a published notice in hand, call a housing counselor or an attorney today. A short sale needs time for a buyer, the servicer’s review and a closing, and every week counts.
What should Downriver sellers do first?
Start early, start in writing and get free help.
- Call the servicer. Ask what loss mitigation options exist for your loan, whether a short sale is one of them, and what a complete application requires.
- Get your three numbers. A written payoff, a realistic price and an estimate of selling costs.
- Talk to a HUD-approved housing counselor. The CFPB points homeowners to its Find a Counselor tool and the HOPE Hotline at (888) 995-HOPE (4673).
- Ask for the deficiency waiver in writing before you accept any terms.
- See a tax professional about whether the forgiven debt will be taxable.
- Plan the listing around the servicer. Your agent will need to know the servicer’s process from the start, because the buyer’s offer goes to the servicer for approval.
Being underwater doesn’t mean you’re out of choices. It means the choices run through the servicer, and the sooner you start that conversation, the more room you have. Once you’re ready to list, our post on when to hand over the seller’s disclosure covers the next paperwork step.
Frequently asked questions
Does a short sale stop a foreclosure?
Not by itself. A short sale is one of the options a servicer can offer instead of foreclosure. Under the federal servicing rule, a complete application that reaches the servicer more than 37 days before a scheduled foreclosure sale has to be evaluated, and the servicer generally can't hold the sale while that application is being decided. Get every application in early, and ask the servicer in writing where the foreclosure stands.
Can the lender still come after me for the rest of the loan?
It can, unless it agrees otherwise. The CFPB says that in some states you may still owe the difference after a short sale, and that some lenders could sue to collect it. Ask for a deficiency waiver before the sale and keep a written copy.
Is a foreclosure in Michigan any better on that point?
Not necessarily. Michigan's foreclosure-by-advertisement law, MCL 600.3280, describes a lender that buys the home at its own foreclosure sale suing the borrower for a deficiency, and gives the borrower a defense if the home was worth the debt or the bid was well below its value. Talk to an attorney about your own loan before you decide.
Will I get a tax form after a short sale?
You may. The IRS says a creditor may send a Form 1099-C showing the amount of debt canceled and the date. You're responsible for reporting the correct amount even if the form is wrong, so take it to a tax professional.
Who can help me sort out the options for free?
The CFPB points homeowners to HUD-approved housing counselors. You can find one with the CFPB's Find a Counselor tool or call the HOPE Hotline at (888) 995-HOPE (4673).
Sources
- CFPB, What is a short sale?
- CFPB, What happens after I complete an application to determine my options to avoid foreclosure?
- 12 CFR 1024.41, Loss mitigation procedures (Code of Federal Regulations, January 1, 2024 edition, govinfo)
- IRS, Topic no. 431, Canceled debt – Is it taxable or not?
- Michigan Legislature, MCL 600.3208, Notice of foreclosure sale
- Michigan Legislature, MCL 600.3240, Redemption after foreclosure sale
- Michigan Legislature, MCL 600.3280, Deficiency judgment defense
Ready to talk strategy? Call David Goad at 313-319-7688.
If you want to dig deeper into the local market, check out the Downriver MI Real Estate Guide. And if you want to get a better feel for who I am and how I work, here's the About David Goad — Downriver Realtor page. If you're comparing agents and trying to figure out who really knows this market, this page on the best Realtor in Downriver MI gives you more context too.
