Selling your home for less than the outstanding balance on your mortgage can be done without the cooperation of your lender only if you pay the difference back to the lender. A short payoff and a short sale are other alternatives for underwater mortgages, but both require working with the lender to conclude the transaction. All are preferable to a lender as they yield a greater return to the bank than would a costly foreclosure.
Pay the Difference
If you have enough cash to pay the difference between the sale price and the outstanding mortgage, sell the home without the lender’s permission, knowing that you’re responsible for the balance. Your credit won’t be affected if you’re current in the mortgage payments. You'll also be eligible to buy another home immediately.
Some lenders allow you to take a loan for the payoff amount, known as a short payoff. The lender agrees to release the lien on the existing property and then writes an unsecured loan. Be prepared to show how continuing to make the full mortgage payments creates a financial hardship, but you are able to make the payoff payments. Your payment history must be clean and your credit excellent to take advantage of it. Your credit score won’t suffer under a short payoff because you are paying your debt.
An owner who can no longer afford to make his mortgage payments due to a hardship can apply to his lender for short sale approval. Work with the asset manager in your lender’s loss mitigation department and a certified short sale specialist to manage the extensive paperwork involved. It’s to your advantage to cooperate with a short sale rather than face a foreclosure. You won't be liable for the outstanding debt if the lender agrees not to seek a deficiency judgment.
Short Sale Limitations
A short sale affects your credit score by lowering it. You also must wait a period of time before applying for a new mortgage on another property. These time periods differ for each borrower’s situation. If you didn’t miss any mortgage payments but sold your home as a short sale, your period of redemption is less than if missed payments accrued.
Last Minute Hurdles
Some lenders require the owner to come to the closing table with funds to compensate the lender’s loss. This may be in the form of outstanding homeowner association fees, back taxes or a contribution to the loss. Many states have regulations preventing lenders from pursuing a full deficiency judgment against an owner with an outstanding balance. You may owe taxes on the outstanding balance, however.
- National Association of Realtors. "Short Sales & Foreclosures." Accessed June 30, 2020.
- American Bar Association. "A Checklist for Insuring a Short Sale." Accessed June 30, 2020.
- National Association of Realtors. "The Short Sale Workflow." Accessed June 30, 2020.
- National Association of Realtors. "Short Sale Relief on the Horizon?" Accessed June 30, 2020.
Jann Seal is published in magazines throughout the country and is noted for her design and decor articles and celebrity *in-home* interviews. An English degree from the University of Maryland and extensive travels and relocations to other countries have added to her decorating insight.