Okay—let’s talk about one of those financial situations no one plans to be in, but a surprising number of people face: selling your home for less than what you owe on the mortgage.
Maybe the market dipped. Maybe life threw a curveball—a divorce, job loss, or unexpected move. Whatever brought you here, you’re not alone. And no, it’s not the end of the world (or your credit score), though it might feel like it for a minute.
Let’s break this down without the stiff, lawyer-y language. Here’s what really happens when you’re underwater on your mortgage, and what options you have if you need to sell anyway.
What Does It Mean to Sell for Less Than the Mortgage?
Say you still owe $290,000 on your mortgage, but your home’s current market value is around $250,000. That means if you sell at market value, you’ll be short $40,000—not including closing costs.
This is what people mean when they say they’re underwater or upside down on their mortgage.
And yeah, it sounds bad. But you’ve got a few possible paths forward, depending on your lender, your financials, and how things play out.
1. The Short Sale Route
A short sale is when you sell the home for less than you owe—and your lender agrees to accept the lower amount as payment in full.
It’s not automatic. You’ll need to:
Prove financial hardship
Show that selling is your only realistic option
Get the lender’s written approval before listing
Short sales can be long and frustrating (despite the name), but they’re often a better alternative than foreclosure. Just know: your credit will take a hit, and not all lenders forgive the difference.
💬 “We went through a short sale in 2013. The paperwork was brutal, but our lender waived the deficiency. Took a year to rebuild our credit, but we were relieved not to lose everything.” – Jenna, Ohio
2. Bringing Cash to Closing
If you’ve got savings (or a family member willing to help), you can cover the difference out of pocket. Not ideal, but it can save your credit and help you walk away clean.
This works best if the gap is small—maybe a few thousand dollars.
💡 Tip: Some sellers negotiate with buyers to increase the purchase price slightly in exchange for covering closing costs. It’s worth asking your real estate agent about creative structuring.
3. Renting It Out Until You Break Even
If the market isn’t cooperating, but you don’t need to sell urgently, consider renting the place out.
It won’t erase the underwater mortgage, but it can give you time to wait for the market to rebound—and possibly generate some cash flow in the meantime.
Just be realistic about:
Local rental rates
Property management costs
Tax implications
4. Loan Modification or Deed in Lieu
If you’re struggling with payments and selling isn’t viable, talk to your lender about alternatives:
Loan modification: Adjusts your loan terms to lower your monthly payments
Deed in lieu of foreclosure: You hand over the keys, and the lender forgives the mortgage
Both can affect your credit, but typically less than a foreclosure. And they may leave you eligible to buy again sooner.
But What About the Deficiency Balance?
That’s the leftover debt after the sale if the lender doesn’t forgive it.
Some states have anti-deficiency laws that protect you (like California or Arizona in certain cases), while others don’t. You might:
Owe the balance outright
Be offered a repayment plan
Be taken to court (rare, but possible)
👉 Speak to a real estate attorney or housing counselor before signing anything. Sites like HUD.gov offer free or low-cost help.
FAQs: Selling for Less Than You Owe
Q: Will I owe taxes on the forgiven amount?
A: Sometimes, yes. But the Mortgage Forgiveness Debt Relief Act may exclude it from taxable income—check the current IRS rules or talk to a tax pro.
Q: How long will it affect my credit?
A: A short sale can stay on your credit report for 7 years, but you might qualify for another mortgage in 2–4 years, depending on the loan type.
Q: Can I sell without my lender’s permission?
A: Only if you bring cash to cover the difference. Otherwise, your lender must approve a short sale or deed in lieu.
Q: Is foreclosure better than a short sale?
A: Generally, no. A short sale is less damaging to your credit and can give you more control over the process.
Final Thoughts
Selling a home for less than the mortgage is tough, no doubt. But it’s not the financial death sentence it’s often made out to be. With the right strategy—and maybe a little legal help—you can find a way forward.
You don’t have to go it alone. Start by talking to your lender, a trusted real estate agent, and a housing counselor. The sooner you take action, the more options you’ll have.
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