For some reasons, there are times when the value of the house is less than the amount of money owed. A solution to this is to wait for some time for the house to appreciate and then the problem is solved. But for some who may need to sell the house quick for some reason like relocation, financial hardship, divorce, death, illness, or anything at all, they might sell at a loss. The result of selling at a loss would make the seller suffer and might not be able to pay the closing costs.

What needs to be done?

1. Do nothing

One option is to do nothing and not make mortgage payment. That's a worst-case scenario because it will impact on the owner’s credit rating more severely than anything else possibly can.

2. Short Sale

Intention to short sale

The owner can also do a "short sale." This is when the owner admits to the lender the difficulty of paying and let them know about the lack of money and seller then request the lender to accept less money than owed.

At first instance, no lender would want to do that, but would also have second thoughts on the costs related to foreclosure, repairs and replacement of defects in the home, and placing the house on the market and at the same time the lender is not assured that he will get the best price in the market.

Lenders absolutely hate to foreclose, so they “may” be willing to consider a short sale.

Paperwork

A short sale involves a lot of paperwork, time and effort and it is best if the owner has a real estate agent or someone knowledgeable to help the owner/seller through the process and give moral support. This process may entail a lot of stress.

Contact the lender or the particular unit/department in charge of the loan. Use the phone and the mail. Keep records.

The lender will ask the owner/seller to submit a financial statement. They want to make sure that the owner/seller really doesn’t have the financial assets to repay the loan.

Tentative agreement and putting the home on the market

Assuming an agreement between the lender and the owner was forged to proceed with the short sale.

A real estate agent still has to put the home on the market, find a buyer, and get a bona fide offer. Once that has been accomplished, all contracts and paperwork will be sent to the lender for a decision. This will take time as there is more than one decision maker involved.

The lender isn't usually your lender. They just service the loan for on behalf of the actual lender, the investor. The papers evaluated by the investor for a decision.

Assuming there is mortgage insurance on the loan, the insurer is another decision maker in the process. Mortgage insurance covers lenders in the case of loan defaults. That way they can justify making high LTV (loan-to-value) loans.

Approval and proceeding with the Sale

If the investor and the insurer both agree to approve the short sale, the owner/seller can now proceed with short sale of the house.