You’ve dropped your price three times. Your home in Mississauga, Richmond Hill, or Oakville has been on the market for over a year. Finally, a buyer makes an offer—but it’s not enough to cover what you owe on your mortgages. You breathe a sigh of relief anyway. At least you can move on with your life, right?

Not so fast.

Welcome to the confusing, frustrating world of short sales—where even when everyone agrees on a price, your lender might torpedo the whole deal. And then, bizarrely, proceed with a power of sale and lose even more money doing so.

Table of Contents

1. What Exactly Is a Short Sale?

2. The Maddening Question: Why Would a Bank Say No?

3. Short Sale vs. Power of Sale (Ontario)

4. The Legal Nightmare: What If You Already Have a Buyer?

5. What Should You Do If You’re Stuck?

6. The Bottom Line

Key Takeaways

• The Definition: A short sale occurs when a property is sold for less than the total mortgage balance, requiring lender approval.

• Banking Dysfunction: Lenders often reject viable short sale offers due to rigid policies, only to lose significantly more through the Power of Sale process.

• Contract Risks: Without a “short sale contingency” clause, sellers can be sued for breach of contract if the bank refuses to approve the deal.

• Credit Impact: While both hurt, a short sale is generally less damaging to your credit score and future buying power than a Power of Sale.

What Exactly Is a Short Sale?

A short sale happens when you sell your home for less than what you owe on it. The sale is “short” of the full loan amount.

A Typical GTA Example:

• What you owe: $700,000 (first mortgage) + $100,000 (second mortgage/HELOC) = $800,000 total

• Your buyer’s offer: $680,000

• The shortfall: $120,000

Here’s the catch: You can’t complete this sale without your lenders’ approval. They’re taking a loss, so they get to decide whether to accept it.

The Maddening Question: Why Would a Bank Say No?

This is where things stop making sense to most homeowners. You’d think a bank would jump at the chance to cut their losses, especially compared to the expensive mess of power of sale. But banks reject reasonable short sale offers all the time.

Here’s why:

1. They Think They Can Do Better: Your lender might believe your home is worth more than the offer, even after a year on the market. They may think they can sell it for more after power of sale. Sometimes they’re right. Often they’re not.

2. Corporate Policy Handcuffs: Large banks have rigid approval formulas. If your short sale doesn’t check certain boxes—even if it makes financial sense—the loss mitigation officer reviewing your file might have no authority to approve it.

3. The Right Hand Doesn’t Know What the Left Is Doing: The department reviewing your short sale often has zero communication with the power of sale department. They have different budgets, different bosses, and different performance metrics.

4. Accounting Tricks: Taking a $120,000 loss this quarter looks bad on earnings reports. Delaying that loss—even if it grows larger—might be preferable for short-term accounting purposes.

5. Second Lien Holders Have Nothing to Lose: If you have a second mortgage or HELOC, that lender is last in line. After the first mortgage is paid, there might be nothing left for them. So why approve? They hold out hoping you’ll pay them something just to make the deal happen.

What Actually Happens: Short Sale vs. Power of Sale (Ontario)

The Irony: Banks routinely reject short sales, go through expensive power of sale proceedings, and end up selling the property for less than the original short sale offer—after paying thousands in legal fees, property taxes, maintenance, and utilities. This is particularly common in the GTA where property carrying costs are substantial.

The Legal Nightmare: What If You Already Have a Buyer?

Here’s where sellers get really trapped. You’ve signed a contract with a buyer. They’ve put down earnest money. They’ve gotten inspections and appraisals. Then your lender says no.

Can the buyer sue you?

It depends entirely on whether your Agreement of Purchase and Sale included a “short sale contingency” clause.

• ✓ If You Have a Short Sale Contingency: The contract states the sale is “subject to lender approval.” If the lender rejects it, you’re generally not liable. The buyer gets their earnest money back, and everyone walks away (frustrated, but legally protected).

• ✗ If You DON’T Have a Short Sale Contingency: You could be liable for breach of contract. The buyer might sue for the return of their deposit, out-of-pocket expenses, or even the cost difference of buying a more expensive home.

This is why having an experienced agent and lawyer is critical.

What Should You Do If You’re Stuck in This Situation?

• Step 1: Check Your Contract Immediately: Does it have a short sale contingency? This determines your legal exposure.

• Step 2: Hire a Real Estate Lawyer: Find one who specializes in short sales and power of sale defense in Ontario.

• Step 3: Document Everything: Save every communication with your lender to protect yourself if legal action is taken.

• Step 4: Push Back on the Lender: Have your lawyer submit a detailed package showing your financial hardship and proving the power of sale will cost the bank more.

• Step 5: Keep Your Buyer Informed: Transparency can prevent lawsuits.

• Step 6: Consider Your Nuclear Options: Can you bring cash to closing? Will the buyer increase their offer? Or, as a last resort, let it go to power of sale.

The Brutal Truth About Short Sales

Short sales reveal some of the most frustrating dysfunction in the banking system. The people reviewing your file often have never met you, don’t know the GTA market, and are judged on metrics unrelated to minimizing actual losses. Meanwhile, you’re caught in the middle—facing potential legal action from multiple directions.

The Bottom Line

If you’re underwater on your mortgage in the Greater Toronto Area and thinking about selling, understand this: a short sale is not a simple transaction. It’s a negotiation with your lender where you have very little leverage.

Get professional help early:

• A real estate agent experienced in GTA short sales

• A real estate lawyer specializing in short sales (not optional)

• A CPA or tax advisor (short sales have tax implications under Canadian law)

And whatever you do, make absolutely certain any Agreement of Purchase and Sale includes explicit short sale contingency language. Your entire financial future might depend on it.

About the Author: Aman Harish

Aman Harish is a Co-Owner and Mortgage Broker at Canadian Mortgage Services. With over 14 years of experience navigating the complexities of the Canadian lending landscape, Aman specializes in helping homeowners and buyers develop proactive renewal strategies and optimize their debt structure in challenging economic climates. His commitment is to ensuring clients not only secure the best rates but also build long-term financial resilience.