Short Sale — Understanding your options when you're underwater on your Hawai'i home.

A short sale occurs when you sell your home for less than the outstanding mortgage balance — with your lender's approval. The lender agrees to accept less than they are owed to avoid the time and expense of foreclosure.

In Hawai'i, where property values fluctuate and some homeowners purchased at peak prices, being underwater is not uncommon. A short sale is one of several options — and it is not always the best one.

Typical Process: You contact your lender's loss mitigation department and submit a short sale package including a hardship letter, bank statements, and proof of financial hardship. Your lender then evaluates the property value and your situation — usually taking 2–3 months minimum for approval.

Important Timeline: Start early. The short sale process is slow. Once foreclosure proceedings begin (after Notice of Default is filed), your window for a short sale shrinks dramatically. Many lenders will no longer approve a short sale once auction date is set.

What Lenders Require: Pre-approval letter from buyer's lender (or proof of cash funds), comparative market analysis showing property value, your hardship documentation, and often proof that you cannot afford to pay the full balance.

Buyer Offer Process: A buyer makes an offer to you, which you accept — but the property stays listed in MLS until your lender gives written approval. Your lender is not obligated to approve any offer, even at asking price. Plan for 2–3 months of bank review.

Critical distinction: Hawaii allows deficiency judgments — but whether you're at risk depends on what type of foreclosure your lender files.

Action: Contact a Hawai'i attorney immediately to determine which type of foreclosure your lender is pursuing. This determines your entire risk picture. If non-judicial, you're protected. If judicial, consult legal counsel before approving any short sale.

The 1099-C Form: If your lender forgives any portion of the debt in a short sale, they must send you a Form 1099-C reporting the forgiven amount as "cancellation of debt income." For example, if you owe $400,000 and sell for $350,000, the lender reports $50,000 of forgiven debt.

Good news (mostly): If the short sale was on your primary residence and you entered into a written agreement before January 1, 2026, you may be able to exclude the forgiven debt from taxable income using the Qualified Principal Residence Indebtedness (QPRI) exclusion — even if the actual discharge happens after 2026. There are also exceptions for insolvency (debts exceed assets).

What you must do: Consult a tax professional or CPA before finalizing any short sale. The tax implications can be substantial, and filing requirements depend on your specific situation. Do not assume you'll owe nothing — and do not ignore the 1099-C when it arrives.

Deficiency and Taxes: If your lender pursues a deficiency judgment (see Hawaii Deficiency section above), you could face both a judgment debt AND tax consequences. This is why legal review is critical.

Initial Credit Hit: A short sale typically drops your credit score by 100–160 points depending on your score at the time. Higher scores take bigger hits.

How Long It Stays: The short sale remains on your credit report for 7 years from the first missed payment that triggered the process.

Recovery Timeline: This is the good news. Unlike foreclosure, a short sale allows faster recovery:

Speed Your Recovery: Pay all other bills on time, keep credit card balances below 30% of limits, and monitor your credit report for errors. Most people see measurable improvement within 18–24 months of making on-time payments.

⚠️ VA Loan Holders — Consider This Before Short Sale

If your loan is VA-guaranteed, you may have access to a more powerful tool than a short sale: the new VA Partial Claim Program (created July 2025). This program can bring your loan current without changing your monthly payment or interest rate — and without selling your home. A short sale forgives debt but damages your credit for 7 years. A Partial Claim preserves your home, your credit, and your financial stability. Call the VA Regional Loan Center FIRST at 877-827-3702 (option 5) before deciding on a short sale. See full details on the Military & Veteran page →