In some cases it is possible to sell your home for less than what is owed on the mortgage. This is a complex scenario and depends on the lender. This situation is known as a "short sale." Sometimes a lender will be willing to split the difference between the sale price and loan amount, which still must be paid.
A short sale may be more complicated if the loan has been sold to the secondary market because then the lender will have to get permission from Freddie Mac, the two major secondary-market players.
If the loan was a low down payment mortgage with private mortgage insurance, then the lender also must involve the mortgage insurance company that insured the low-down loan.
Foreclosure proceedings are generally started after a borrower has missed three mortgage payments. The lender will notify the borrower that he or she is in default, and record a notice of default against the real estate property. Unless the debt is satisfied, the lender will foreclose on the mortgage and proceed to set up a trustee sale of the home. The lender can request a trustee's sale or a judicial foreclosure, in which the property is sold at public auction.
A borrower can avoid the foreclosure by paying the overdue amount and the pending payment after the notice of default is recorded, usually no later than a few days before the property's sale.
Some sales allow the successful bidder to take possession immediately. If the former owner refuses to vacate the premises, the court can issue an eviction order.
Borrowers should do everything they can to avoid foreclosure, which is one of the most damaging events that can occur in an individual's credit history.
Bankruptcies and foreclosures can remain on a credit report for 7 to 10 years. Some lenders will consider a borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender's decision. If the borrower went through a bankruptcy because their employer had financial difficulties, a lender may be more sympathetic. If a bankruptcy is due to overextended personal credit lines, the lender probably will be less inclined to work with that borrower.
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