ArcaMax

Dear Monty: If I sell my home at a loss, do I have to repay the mortgage company?

Monty's Answer: When selling a home for less than you owe on the mortgage (being "underwater"), you generally remain responsible for the entire mortgage amount. However, today's market offers several vital options and protections.

First, verify your home's true market value through multiple professional opinions. Many homeowners rely on a single estimate, but obtaining an appraisal and a broker price opinion can provide a more accurate value range. This information is crucial for making informed decisions. Before proceeding, determine if Freddie Mac or Fannie Mae owns your loan, which can significantly impact your options. These organizations own approximately 70% of U.S. residential mortgages and offer specific assistance programs. Here are the main options available:

Traditional Sale with Out-of-Pocket Payment: If you have savings or assets, you can pay the difference between the sale price and mortgage balance at closing, plus associated costs.

Short Sale: Request lender approval to sell the home for less than the mortgage balance. While traditionally challenging, many lenders have become more cooperative with short sales since they often cost less than foreclosure. However, be aware of potential tax implications and seek professional tax advice.

Loan Modification Programs: The Home Affordable Modification Program and Home Affordable Refinance Program have evolved. While specific program names have changed, lenders still offer various modification options for struggling homeowners who are either current on payments or facing imminent default. Here are three:

No. 1: COVID-19 Loss Mitigation is a program specifically for FHA loans. You must be at least 61 days delinquent. This program will expire in April 2025.

No. 2: HUD standard loss mitigation. To qualify, you must be at least 61 days but no more than 12 months delinquent. You must also live in the home and not be in foreclosure.

No. 3: Fannie Mae and Freddie Mac Flex Modification. You must be 60 days behind, or default will begin soon. You must also have a hardship.

Rental Option: Converting your home to a rental property could help cover the mortgage while waiting for market conditions to improve. However, being a landlord requires specific skills and knowledge. The rental income should cover the mortgage, maintenance costs and potential vacancies.

Deed instead of Foreclosure: Negotiate to transfer the property directly to the lender to satisfy the debt, potentially avoiding foreclosure proceedings.

State-Specific Protections: Some states have anti-deficiency laws that protect homeowners from paying the remaining balance after a foreclosure or short sale. These laws vary significantly by location.

Important considerations before making your decision:

-- Evaluate your current job stability and financial situation

-- Review your other assets and ability to cover any shortfall

-- Consider whether you can find suitable alternative housing

-- Understand your state's specific laws regarding mortgage deficiency

-- Assess the impact on your credit score

-- Speak with a tax professional

The key to navigating this situation is being proactive. Contact your mortgage servicer early to discuss options, and consult a real estate attorney familiar with your state's laws. Many lenders offer hardship programs and prefer working out solutions rather than pursuing foreclosure. Remember that while selling at a loss is challenging, it might be preferable to foreclosure, which can have more severe and longer-lasting consequences for your financial health.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @dearmonty or DearMonty.com.

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