Selling a Home for Less Than I Owe - How Will It Affect Me?

Reader Question: If we sell a house for less than it is worth and make arrangements with our mortgage company to pay the difference, how will that affect us getting a new mortgage?

It sounds like you're talking about a short sale process, in which the lender agrees to let you sell the home for less than what you owe. For a long time, this technique was primarily used as a way to avoid foreclosure when homeowners fall behind on their mortgage payments.

But these days, more and more homeowners are seeking this kind of arrangement with their lenders. This is because property values have dropped so drastically in many cities. As a result, many homeowners are now discovering that they owe more on their mortgage loan than the home is actually worth (in the current market).

The intermediary factor we haven't talked about yet is your credit score. I believe you mean to ask, "How will this kind of transaction affect my credit score?"

As long as you don't default on the loan (by ignoring your payments altogether), I can't see why this would affect your credit score in any significant way. A full foreclosure, on the other hand, can seriously harm your credit score. But based on everything I've read or heard, the kind of arrangement you're talking about should not have any major credit implications ... as long as you pay off what you owe in some way, shape or form.

When you apply for your next mortgage loan, the lender is going to look at the usual factors to qualify you. This includes your credit score, your debt-to-income ratio, and your overall income level. If you measure up in all of these areas, and you have a sufficient down payment, you have a good chance of being approved. Lenders know that the economic crisis put a lot of people into a bind. So if you meet their basic lending criteria, and they feel you are a reasonable risk, they won't dig too much into the past.