You can sell your home while you still have a mortgage, although you must satisfy whatever liens are against your home at settlement. There are usually few restrictions from keeping a homeowner from listing her home for sale and selling that home to a qualified buyer. Once the home has been sold, certain liens and expenses related to the home must be satisfied, which means you may still owe money following that sale.
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The proceeds from the sale of your home must be used to pay off your mortgage. If you owe property taxes and other liens are involved, then you must also handle those obligations. In Idaho, for example, if you do not pay your property taxes, the state will not issue a clear title for the home, effectively keeping the home from selling.
If you sell you home and still owe money on your mortgage, the bank has two options at its disposal. One option is for the bank to accept your sale and cancel your remaining debt. The second option is for the bank to expect you to pay the difference, an amount they may finance through an unsecured loan. If the bank forgives the difference, the IRS may consider that amount as taxable income. You must filed IRS Form 982 to reflect the amount of money forgiven.
You can also approach the bank prior to selling your home about a possible short sale. Under this arrangement, you have a buyer in mind who is willing to buy your home for less than what you owe on your mortgage. The bank agrees to the reduced amount and allows the sale to go through. You no longer have any obligation for the home with no additional funds owed. Homeowners who successfully complete a short sale will receive IRS Form 1099-C -- Cancellation of Debt -- reflecting the loan forgiveness.
If you have filed for Chapter 13 bankruptcy, you may need to obtain the bankruptcy trustee's approval or court approval to sell your home. If approved, then the proceeds from the sale of your home can be used to satisfy your debts under the bankruptcy code.
Consult with an attorney before selling your home, particularly if you believe that you will come up short when the transaction has been completed. An attorney will advise you about your rights and obligations including satisfying other liens such as property taxes, association dues and second mortgages or equity lines of credit. Consumers seeking to sell a home for less than what is owed on their mortgage should understand that their credit rating will suffer and a short sale or similar agreement will become a matter of record on their consumer reports. According to the state of Washington, "A short sale may appear on your credit report as "pre-foreclosure redemption," "paid in full for less than full balance" or other similar term."
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