Understanding the Basics
Selling your house for less than you owe on the mortgage is often called a “short sale.” This means the sale price does not cover the remaining debt on your loan. When this happens, the amount you owe after the sale doesn’t disappear automatically. The lender will generally expect you to pay the difference unless some kind of agreement is reached.
What Happens Immediately After the Sale
Once your house sells for less than the mortgage balance, the lender reviews the situation. They can decide to accept the sale proceeds as full payment or ask you to pay the remaining amount — the “deficiency balance.” Whether you owe this deficiency depends on your lender’s policies, your loan terms, and state laws.
In some cases, lenders agree to forgive the remaining debt, especially if your financial hardship is clear and the house value has dropped significantly. But this is not guaranteed and often requires approval before the sale.
Risks and Consequences to Consider
One major risk is being responsible for the deficiency balance after closing. If the lender pursues the remaining debt, you could face collections or even a lawsuit. This can impact your credit score for years and make it harder to buy property or obtain loans in the future.
Another potential risk is tax implications. Sometimes, forgiven mortgage debt can be treated as taxable income, meaning you might owe taxes on an amount you never actually received. There are exceptions, but this is something to watch out for.
Timing matters too. A short sale can take weeks to months to process because lenders must approve selling the property below the loan balance. During this time, you may still be responsible for mortgage payments, taxes, and insurance. Failing to keep payments current can add more complications.
Common Mistakes People Make
One common mistake is assuming that selling below what you owe means you are immediately free of any mortgage responsibility. In most cases, you are not fully relieved until the lender confirms any deficiency balance is forgiven or otherwise settled.
Another misunderstanding is neglecting to consider the impact on credit scores. Even a short sale typically lowers your credit score, and the longer it takes to resolve deficiency balances, the more damage it can do.
Many sellers also overlook tax questions around forgiven debt. It’s important to understand that the IRS may consider forgiven debt as income, which can create unexpected tax bills.
What If Things Go Wrong?
If you sell your home for less than you owe without resolving the deficiency upfront, you risk ongoing financial consequences. The lender might pursue collection of the remaining balance. This might include wage garnishments, liens on other property, or legal judgments depending on what the lender decides and what protections your loan documents or Tennessee state laws provide.
If you ignore communications from your lender regarding the deficiency, issues can escalate, including damage to your credit and possible court involvement.
Delays in selling or mishandling the sale process can also lead to missed payments, increased fees, and foreclosure actions in some cases.
Thinking Through Your Decision
Deciding to sell your home for less than you owe is a complicated choice with significant consequences. It’s important to fully understand what your lender requires and what your best options are before moving forward.
Look closely at the financial impact beyond just the sale price, including potential remaining debts and credit impact. Consider how long you can afford to keep paying on the mortgage while waiting for lender decisions. And watch for tax consequences after the sale.
Getting clear information about your mortgage terms and how your lender handles short sales is crucial before accepting any sale offer below the mortgage payoff amount.
Key takeaways
- Selling for less than you owe doesn’t usually erase your mortgage debt immediately.
- Lenders may require you to pay the remaining loan balance, known as a deficiency.
- Short sales can hurt your credit and may take months to complete.
- Forgiven debt might be taxed as income, leading to additional costs.
- Ignoring lender communications or deficiency balances can lead to collections or lawsuits.
- It’s important to understand your mortgage terms and lender policies before proceeding.
- For legal or tax concerns, consider speaking with a Tennessee-licensed real estate attorney or local title company.
