What Happens If I Sell My House for Less Than I Owe on the Mortgage?

For many homeowners, selling a house is a major financial decision. However, when you find yourself in a situation where the sale price is less than the amount due on your mortgage, it can be a challenging and confusing process to sell your home. In this article, we will explore the options and consequences of selling a property for less than what you owe on the mortgage balance. Whether you’re considering a short sale or looking at alternatives like a deed in lieu of foreclosure, understanding the implications is crucial.

1. What is a Short Sale and How Does It Work?

Definition of a Short Sale

A short sale is a real estate transaction where you sell your house for less than the remaining mortgage amount. This is often initiated when a property owner is facing financial distress and unable to continue making mortgage loan payments.

The Short Sale Process: Step by Step

  1. Listing the Property: The first step in a short sale is to list the property for sale on the real estate market. Homeowners typically work with a real estate agent to market and promote the property effectively. The listing includes all the essential details about the house, such as its features, condition, and asking price. The asking price is typically lower than the outstanding mortgage balance, reflecting the intention to sell the home for less than what is owed on the existing mortgage.
  2. Finding a Qualified Buyer: To proceed with a short sale, it’s crucial to find a buyer who is willing to purchase the property at the reduced price. Buyers interested in short sales often include real estate investors, bargain hunters, or individuals who are aware of the unique circumstances surrounding these transactions. The buyer must be financially capable of closing the deal and should be informed about the potential delays and complexities associated with short sales.
  3. Negotiating with the Mortgage Company: After securing a willing buyer, the property owner and their real estate agent enter into negotiations with the mortgage company. These negotiations are critical because the mortgage company holds the ultimate decision-making power regarding whether to approve the short sale. During negotiations, the parties discuss the proposed sale price, terms of the sale, and the financial hardship that led to the need for a short sale. The goal is to reach an agreement that is mutually acceptable to both the property owner and the mortgage company.
  4. Obtaining Approval for the Sale: Once an agreement is reached with the mortgage company, the next step is to obtain formal approval for the short sale. This involves submitting a comprehensive short sale package to the mortgage company, including financial documents, a hardship letter explaining the homeowner’s financial challenges, the purchase agreement with the buyer, and other required paperwork. The mortgage company’s approval is necessary to proceed with the sale. The timeline for approval can vary, and it may take several weeks or even months to receive a response.

Lender Considerations for a Short Sale

Lenders evaluate short sale requests based on several factors, including:

  • Financial Benefit: Lenders typically agree to a short sale if it is financially beneficial to them when compared to the costs associated with foreclosure. A short sale may result in a smaller financial loss for the lender, which makes it an attractive alternative.
  • Housing Market Conditions: Current market conditions and property values play a role in the lender’s decision. Falling house prices can make it unlikely to recoup the full mortgage balance through a foreclosure auction, a short sale may be favored.
  • Homeowner’s Financial Hardship: Lenders also consider the property owner’s financial hardship, which is a key factor in granting approval. Common hardships include job loss, illness, divorce, or other circumstances that make it impossible to continue mortgage payments.
  • Buyer’s Offer: The lender evaluates the buyer’s offer to ensure it aligns with market values and provides a fair deal.
  • Negotiated Terms: The terms negotiated between the property owner, buyer, and lender should be reasonable and in the lender’s best interests.

Benefits of a Short Sale

  • Avoiding foreclosure and its damaging effects on credit.
  • Selling the house without the burden of an underwater home mortgage.
  • Reducing or eliminating the deficiency balance, depending on the lender’s terms.

Drawbacks of a Short Sale

  • Lengthy and complicated process.
  • Approval from the lender is not guaranteed.
  • Potential tax implications and credit score impact.

2. Can I Sell My House for Less Than I Owe on the Mortgage?

Understanding Negative Equity

Negative equity, or being “underwater,” occurs when the remaining mortgage balance is higher than the current market value of your property. This situation is often a trigger for exploring options like a short sale.

Options for Selling a House with Negative Equity

  • Working with a Real Estate Agent: Experienced agents can help navigate the market, negotiate with buyers, and coordinate with your lender to facilitate a short sale.
  • Working with a Real Estate Investor: Some investors specialize in purchasing properties with negative equity, offering a quick sale option.
  • Considerations When Selling for Less Than You Owe: Weigh the pros and cons of each option, considering your financial situation and goals.
  • Effects on Credit Score and Future Homebuying: Understand how a short sale may affect your credit and eligibility for future home loans.

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3. What Happens if I Sell My House for Less Than I Owe?

Potential Deficiency Judgment

In a short sale, property owners may hope that the mortgage company will forgive the deficiency balance, which is the difference between the sale price of the property and the outstanding mortgage debt. However, it’s essential to understand that this forgiveness is not guaranteed. The approach to handling the deficiency balance can vary from lender to lender and depend on the specific circumstances of the short sale.

  1. Lender Forgiveness: Some lenders may opt to forgive the deficiency balance as part of the short sale approval. This means that they agree not to pursue the property owner for the outstanding mortgage debt. In such cases, property owners can find relief from a substantial financial burden and move forward without the looming threat of repaying the shortfall.
  2. Deficiency Judgment: On the other hand, some lenders might choose to pursue a deficiency judgment. A deficiency judgment is a legal ruling that holds the property owner responsible for the remaining mortgage debt that was not covered by the short sale proceeds. If a deficiency judgment is issued, the property owner may be required to pay the shortfall, either through negotiated terms with the lender or through legal actions, such as wage garnishment or asset liens.
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Agreements with the Mortgage Lender

Before proceeding with a short sale, negotiate terms with your lender. Some lenders may require a financial contribution from the property owner or impose specific conditions.

Tax Implications of a Short Sale

Short sales can have tax consequences, but certain conditions may exempt you from paying taxes on the forgiven debt. Consult with a tax professional for guidance.

Steps to Take Before Selling for Less Than You Owe

Before proceeding with a short sale, assess your financial situation, consult with a real estate professional, and gather the necessary documentation for your lender.

Alternative Options to Selling for Less Than You Owe

Consider other options, such as loan modification, refinancing, or seeking government assistance programs.

4. How Does Foreclosure Come into Play?

The Foreclosure Process

This is a legal process through which a lender repossesses and auctions off a property when the homeowner fails to make mortgage payments.

Foreclosure vs. Short Sale

Explore the differences between foreclosure and a short sale, including their impact on credit, future homebuying, and the deficiency balance.

Consequences of Foreclosure

This can severely impact your credit, making it challenging to secure new housing or loans in the future.

Preventing Foreclosure

Discuss ways to prevent foreclosure, such as loan modification, negotiating with the lender, or seeking government assistance.

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5. Should I Consider a Deed in Lieu of Foreclosure?

Definition of a Deed in Lieu

A deed in lieu of foreclosure involves voluntarily transferring the property’s ownership to the lender to avoid foreclosure proceedings.

Benefits of a Deed in Lieu of Foreclosure

A deed in lieu of foreclosure can be an appealing option for property owners facing financial hardship and the possibility of losing their home. Some of the key advantages include:

  1. Credit Impact: While a deed in lieu does impact your credit, it is typically less damaging than a full foreclosure. A foreclosure can severely harm your credit score and remain on your credit report for up to seven years, making it challenging to secure new credit or loans. In contrast, a deed in lieu may have a milder impact, potentially allowing you to rebuild your credit more quickly.
  2. Quicker Resolution: Deeds in lieu can provide a faster resolution compared to foreclosure. Foreclosure processes can be lengthy and involve legal proceedings, which can extend the period of uncertainty and stress. Deeds in lieu are often processed more swiftly, allowing property owners to move on with their lives and financial recovery sooner.

Drawbacks of a Deed in Lieu of Foreclosure

While a deed in lieu offers some advantages, it’s important to be aware of the potential drawbacks:

  1. Financial Obligations: Depending on the terms negotiated with the lender, you may still face financial obligations even after transferring the property through a deed in lieu. The lender may require you to pay a portion of the deficiency balance, property taxes, or other costs. These financial responsibilities should be thoroughly discussed and documented in the agreement.
  2. Lender Approval: Not all lenders will agree to a deed in lieu of foreclosure. Lender policies and specific circumstances may influence their willingness to accept this arrangement. It’s essential to work closely with your lender and explore other options if a deed in lieu is not viable in your situation.
  3. Impact on Home Equity: By transferring the property to the lender, you forfeit any remaining home equity. This means that any value you may have built up in the property over the years will be lost.
  4. Tax Implications: Deeds in lieu can have tax consequences, and it’s advisable to consult with a tax professional to understand the potential tax liabilities that may arise from this transaction.

Steps to Take for a Deed in Lieu 

If you’re considering a deed in lieu, communicate with your lender, and understand the terms and conditions.

Alternatives to a Deed in Lieu

Explore alternative options, including short sales, loan modifications, or refinancing, before deciding on a deed in lieu.


If you are in a situation where you need to sell your house for less than your mortgage understand that there are various options and considerations. While a short sale, deed in lieu of foreclosure, or foreclosure each have their own set of advantages and disadvantages, it’s essential to consult with financial and real estate professionals to determine the best course of action for your unique situation. Understanding the potential consequences and being proactive can help you make an informed decision that aligns with your financial goals and needs.


The content provided on this blog is for informational purposes only. We are not attorneys or tax professionals. For personalized legal or tax advice, please consult with a qualified professional.

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