Can a home be sold for less than its mortgage?

Q: Is it possible for a home to be sold for less than its mortgage?

A: Occasionally. But it’s a complicated process and a lot depends on the lender.

The process is referred to as a “short sale,” which occurs when a lender agrees to write off the portion of a mortgage that is higher than the home’s value. Usually, a buyer must be willing to purchase the property first.

A short sale may be more complex if the loan has been sold in the secondary market. The lender will then need permission from Freddie Mac or Fannie Mae, the two major secondary-market players.

If the loan was a low down payment mortgage with private mortgage insurance, the lender also needs to involve the mortgage insurance company that insured the low down payment loan.

The short sale can keep the homeowner from landing in bankruptcy or foreclosure. But the procedure isn’t easy to approve and often involves as much, or more, paperwork than an original mortgage application.

Instead of proving your financial stability and credit worthiness, you must prove you are broke. The remaining difference between your home’s value and the balance on your mortgage is considered a forgiveness of debt, which usually means it is a taxable income. 

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