Thursday, August 20, 2009

Can a house be sold for less than the mortgage?

More and more recently I have been asked about the process of selling a home for less than what an owner owes on a mortgage. The current economy is causing homeowners to have to make some tough decisions.

This process is called a “short sale,” and occurs when a lender agrees to write off the amount of a mortgage that’s higher than the value of a home. A short sale is complicated process but can keep a homeowner from filing bankruptcy or having to go through a foreclosure. However, a lot will depend on the lender, and often it is dependent on having an offer from a buyer.

The lender will have to approve the sale, and this is a complex procedure--after all the lender has to "write-off" the potential future income from the loan, weighing the risk of not being able to collect on the payment. It takes a competent Realtor to navigate with the home seller and the lender to insure all parties are able to get the most out of an often difficult situation.

A short sale can also get more complicated if the loan has been sold to a secondary market, in which case the lender will need permission from Freddie Mac or Fannie Mae. And if the loan was a low down payment mortgage with private mortgage insurance, the lender also will need to involve the mortgage insurance company that insured the low down payment loan.

Unlike when you are buying a home, if you are trying to short-sell you will need to prove you are broke, instead of your credit worthiness. Also the difference between your home’s value and the balance on your mortgage is taxable income, and you will have to pay this tax at the end of the year.

A short sale is not a solution for everyone, but it is one that can benefit many who find themselves in a home for which they cannot maintain mortgage payments.
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