What If You Owe More Than Your Home Is Worth?
Behind on your mortgage does not necessarily mean underwater.
If you owe more on your mortgage than your home would sell for today, you are far from the first. It is arithmetic, not a character flaw.
Before anything else, establish the real numbers
Start with the numbers, because assumptions run wrong both ways. Behind on your mortgage does not necessarily mean underwater. Homeowners months behind often assume nothing is left, then find that current value, real payoffs and recorded liens say otherwise, and that a normal sale or a retention option is still open.
What a short sale is
A short sale is a sale of your home for less than the total owed against it, where the lender agrees to release its lien and let the closing happen even though the proceeds fall short of the payoff. You still own the property, you still sign the listing and the purchase contract, and the home is marketed like any other.
Why lender approval is required, and why no one can promise it
A short sale cannot happen without written approval: the lender holds a recorded lien and does not have to release it. Often the decision is not the servicer's alone — the investor who owns the loan, and any mortgage insurer, may each have to sign off under their own guidelines. No honest person can guarantee approval, so be cautious with anyone who says the outcome is assured.
The financial and hardship documentation you will be asked for
Servicers evaluate hardship, so the paperwork is financial and personal at once. Expect to gather the following, and to refresh anything that goes stale during review.
The servicer's short sale application or borrower financial worksheet, signed
A written hardship letter explaining what changed and when
Recent pay stubs, or profit-and-loss records if self-employed
Recent bank statements
Recent tax returns, plus W-2s or 1099s
A monthly household budget of income and expenses
Signed authorizations so your representatives can speak with the servicer
HOA statements, tax bills, and paperwork for any other lien or judgment
An incomplete file is the most common reason a review stalls. Better an unflattering document than a missing one.
How the lender forms its own opinion of value
Your lender will not take anyone's word for what the property is worth. It orders its own valuation, usually a broker price opinion and sometimes a full appraisal, and that figure drives what it treats as an acceptable net. You cannot control it, but you can inform it: provide access, note condition issues honestly, share repair estimates, and get comparable sales in front of whoever is assigned.
Submitting the offer and what the review involves
Once you accept an offer, it goes to the servicer with the full package. A negotiator is assigned, the valuation is ordered or reconciled, the buyer's financing is examined, and a settlement statement is reviewed to see what each lienholder would receive. Expect requests for updated documents, at least one reassignment, and a wait. Approval, when it comes, is a written letter with conditions and a deadline.
Junior liens: second mortgages, HELOCs and judgments
If a second mortgage, a HELOC, a tax lien or a judgment is recorded against the property, that lienholder must also agree to release before title can transfer. Junior lienholders often receive little from the proceeds, and the senior lender frequently caps what they may be paid. This is where short sales most often stall, and what a junior lienholder may pursue afterward is a question for your attorney.
HOA balances and property tax complications
Unpaid HOA dues, assessments, late fees and collection costs do not disappear at closing, and an association may have recorded its own lien. Delinquent property taxes sit ahead of most other claims and are typically paid from proceeds, which reduces what lenders net and can affect their willingness to approve. Bring those statements to the first conversation.
Relocation assistance is sometimes offered, never promised
Some investors, servicers and programs offer relocation assistance to a homeowner who completes an approved short sale and leaves the property in good condition. Many do not. Eligibility depends on the loan, the investor and current servicer policy, and can change without notice. If assistance is available, it will appear in writing in the approval letter. Treat anything promised verbally as unconfirmed until you see it there.
Possible tax, credit and deficiency consequences
Forgiven or cancelled debt can create tax questions, and a lender may issue a form reporting it. Whether any of it is taxable in your circumstances is a question for a CPA, asked before you sign rather than in April. A short sale is also reported to the credit bureaus, and the effect varies with your history and loan status. No one can tell you in advance what your score will do.
Whether you still owe the shortfall after an approved short sale depends entirely on your state and on what the approval letter says. Some states bar a deficiency after a lender-approved short sale of a one-to-four unit dwelling where the lender consents in writing, and treat a waiver of that protection as void. Many states have no such rule at all, and the lender may pursue you unless the approval letter releases the debt. Several states separately bar a deficiency after a non-judicial trustee sale, which is a different situation from a short sale.
Common exceptions run through all of it: protections generally do not reach corporate, LLC or partnership borrowers, do not cover fraud or waste, and do not extend to guarantors or to other property securing the same note. Do not read this and conclude you are personally protected. Check what applies where your property is — your state page is here — and have an attorney licensed in that state apply it to your actual loans and liens. Then get the release in writing before you close.
Talk to qualified legal, tax and credit professionals
A real estate professional can market a home and assemble a lender package, but cannot give legal, tax or credit advice. Be wary of one who tries. Before signing a listing agreement or an approval letter, talk to an attorney about deficiency exposure and lien releases, and to a CPA about the tax reporting. HUD-approved foreclosure counseling is always free, through the locator at hud.gov or 800-569-4287. Note that state mortgage relief programs funded by the federal Homeowner Assistance Fund have closed in nearly every state.
Information provided is for general educational purposes and is not legal, tax, credit or financial advice. Mortgage-retention and short-sale options require approval from the applicable lender, investor or loan servicer. Available options depend on the homeowner, loan, liens, property value and foreclosure timeline.
How long does a short sale take?
There is no standard answer, because it depends on your servicer, your investor, the number of liens and how complete your file is. It also depends on how much runway your state gives you — the fastest states run about four months from the first formal notice to the sale, the slowest run years. Find your state’s timeline and work backwards from it. Real timelines are commonly longer than the minimum, but they are not guaranteed to be. Start gathering documents before you have decided anything.
I heard listing my house postpones the foreclosure sale. Is that true for a short sale?
This one is widely misreported. A few states give the homeowner a narrow, one-time tool to postpone a sale — for example by delivering a signed listing agreement to the trustee in a prescribed manner within a prescribed window. Where it exists, the delivery method and the deadline are exact, and some versions require a purchase price at least equal to the full balance owed, which a short sale by definition does not meet. Most states have no such tool at all. Do not plan a short sale around one without confirming it applies to you.
Will I still owe the difference after the sale closes?
It depends on the property, the loans, the liens, who the borrower legally is and which state the property is in. Some states bar a deficiency after a lender-approved short sale where the lender consents in writing; many do not. Protections that do exist generally exclude corporate, LLC and partnership borrowers, do not cover fraud or waste, and leave rights as to other property securing the same note intact. Have an attorney licensed in your state apply the law to your actual loans before you assume anything — and make sure the approval letter itself releases the debt in writing.
Can I apply for a loan modification at the same time?
Many homeowners look at retention and sale side by side, which is reasonable. Under federal rules, a servicer that receives a complete loss-mitigation application more than 37 days before a scheduled sale generally may not proceed to that sale while it evaluates the application (12 CFR §1024.41), and several states add stronger protections on top. “Complete” is doing real work in that sentence, so treat missing documents as the risk they are.
Do I have to be behind on payments to do a short sale?
Not necessarily, though servicers generally want to see a documented hardship and a reason the situation is not temporary. Some homeowners who are current still qualify; some who are behind do not. Guidelines differ by loan type, investor and servicer, and they change. The only way to know is to assemble the file and ask.
Understand your value. Know your equity. Review your options.
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KW Home Solutions, part of KW Default Solutions and powered by Keller Williams Realty. Corporate Office: Laguna Niguel, CA.
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