What Happens If I Do a Short Sale in Indiana?
A short sale occurs when you sell your home for less than the amount owed on your mortgage, with your lender's approval. It is an alternative to foreclosure that can help you avoid the most severe consequences of losing your home. But it is not simple, and it is not guaranteed. This page explains exactly how a short sale works in Indiana, what your lender must agree to, and what happens to you afterward.
Call (317) 495-3440 — Free ConsultationWhat Is a Short Sale and When Does It Apply?
A short sale applies when your home is worth less than your outstanding mortgage balance — a situation called being 'underwater' or having negative equity. In a short sale, you sell the property at market value, and your lender agrees to accept the sale proceeds as full or partial satisfaction of the mortgage debt. The lender must approve the sale price and the terms before closing can occur. Short sales are voluntary — your lender is not required to approve one.
The Short Sale Approval Process
To initiate a short sale, you must submit a short sale package to your lender. This typically includes a hardship letter explaining why you cannot continue making payments, financial statements (bank statements, tax returns, pay stubs), a comparative market analysis or appraisal supporting the proposed sale price, and a purchase contract from a buyer. Your lender's loss mitigation department reviews the package and determines whether to approve the sale. This process can take 30–120 days or longer, and approval is not guaranteed.
The Deficiency: Will You Owe the Difference?
The most critical issue in a short sale is whether your lender will waive the deficiency — the difference between the sale price and the amount owed. Under IC 32-29-7-11, Indiana lenders can pursue deficiency judgments after a foreclosure. In a short sale, the deficiency waiver must be negotiated as part of the approval. Always obtain written confirmation that the lender is waiving the deficiency before closing. If the lender does not waive the deficiency, you may still owe the difference after the sale.
Credit Impact of a Short Sale vs. Foreclosure
A short sale typically has a less severe impact on your credit score than a completed foreclosure, though both are significant negative events. A short sale may be reported as 'settled for less than full amount' or 'paid in full for less than full balance.' The impact varies by credit bureau and lender reporting practices. Both a short sale and a foreclosure remain on your credit report for 7 years. Many homeowners find they can qualify for a new mortgage sooner after a short sale than after a foreclosure.
Tax Consequences of a Short Sale
The forgiven debt in a short sale may be treated as taxable income by the IRS under the Mortgage Forgiveness Debt Relief Act. However, there are exclusions for debt forgiven on a primary residence. The tax treatment of short sale deficiency forgiveness is complex and depends on your specific situation. Consult a licensed tax professional or CPA before completing a short sale to understand your potential tax liability.
Indiana Legal References
The following Indiana statutes are referenced on this page. Links go directly to the Indiana General Assembly website.
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