Owing more on your mortgage than the house is actually worth, sometimes called being underwater, feels like it closes off your options, but you can still sell your house. It just requires your lender’s cooperation in a process called a short sale.
Getting Your Lender to Approve a Short Sale
A short sale requires your lender to agree, in writing, to accept less than the full mortgage balance as payment in full. This typically means submitting a hardship letter explaining your financial situation, recent bank statements and pay stubs, and an offer from a real buyer, since lenders generally won’t approve a short sale in the abstract without a specific transaction to evaluate. The lender then orders their own valuation of the property to confirm the offer is reasonable given current market conditions, which adds time to the process beyond a normal sale.
Make Sure Any Remaining Debt Is Actually Forgiven, Not Just Deferred
This is the single most important detail in any short sale negotiation: get explicit written confirmation from the lender that the difference between what’s owed and what the sale nets is forgiven, not simply postponed as a debt owed later. Some short sale approvals include this waiver automatically, but others leave the door open for the lender to pursue that difference afterward unless it’s specifically negotiated. Never assume forgiveness is included just because the sale itself was approved.
The Tax Side of Forgiven Mortgage Debt
Forgiven mortgage debt is technically treated as income by the IRS in many cases, since the homeowner received the benefit of debt that was never actually repaid, though specific exclusions have applied to primary residence debt forgiveness in various tax years. Whether an exclusion applies to a specific short sale depends on current tax law at the time of the sale and the specific situation involved, so this is worth confirming with a tax professional rather than assuming either that taxes will be owed on it or that they definitely won’t.
Deed in Lieu of Foreclosure: The Other Option When You’re Underwater
If a short sale falls through, or a buyer never materializes, a deed in lieu of foreclosure is a separate option worth understanding: ownership of the property transfers voluntarily and directly to the lender in exchange for being released from the mortgage debt, without going through a full foreclosure or finding a buyer at all. Lenders don’t always agree to this, since they generally prefer a short sale that gets the property to a new owner without them having to manage and eventually resell it themselves, but it’s worth asking about directly if a short sale buyer can’t be found before the timeline runs out.
A deed in lieu is generally faster than either a short sale or letting a foreclosure complete, since there’s no buyer to find and no auction to wait for, and like a short sale, it’s worth getting written confirmation that any remaining debt is forgiven as part of the agreement, not left open for the lender to pursue afterward. The credit impact tends to be somewhat less severe than a completed foreclosure, though still more significant than a short sale, which is one more factor worth weighing against how much time is actually left before a scheduled trustee’s sale.
If you’re underwater on your mortgage and trying to figure out whether a short sale, or a different path entirely, makes sense for your situation, call (206) 900-8173 or send us a message. We can also make a direct offer if a short sale timeline doesn’t fit what you’re facing.