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Expert Insights: Can a Home Be Sold for Less than its Mortgage?

Becoming a more and more popular option for distressed homeowners, this process is called a ‘short sale’, which occurs when a lender agrees to write off the portion of a mortgage that is higher than the value of a home. But, 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. Then the lender will 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 will need 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 you must be able to prove your financial hardship. And any remaining difference between your home’s value and the balance on your mortgage is considered a forgiveness of debt, which may mean it is taxable income.