If you owe more on your mortgage than your house is worth, you may want to consider a short sale, where the bank agrees to accept the proceeds from the sale as settlement in full of your mortgage. This page will help you learn how to do a short sale.

The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here.

With real estate values falling, and people having difficulties making mortgage payments due to financial distress, an increasingly large number of homeowners are finding themselves with houses that are "underwater."

Banks are not in the business of owning real estate. If you can convince them that the market value of your house is less than your mortgage, that you cannot continue to make payments on the mortgage, and that the market value is not likely to recover in the near term, they may consent to a short sale. The odds of their agreeing to a short sale are higher if you have an offer letter from a buyer in hand before approaching the bank..

If you can no longer afford your mortgage payments, there are several alternatives to doing a short sale.

1. Refinance: If you are a candidate to refinance your loan, and after refinancing you can afford the payments, the bank is not likely to agree to a short sale.
2. Mortgage modification: The bank may prefer to modify the terms of the loan rather than to take a loss, if it feels that he market will recover or that you will be able to make the modified payments.
3. Foreclosure: The bank may prefer to proceed with foreclosure rather than accept a short sale.
4. Bankruptcy: Depending on the homestead exemption available in your state, you may be able to keep your home after filing for bankruptcy. Eliminating or restructuring your other debts through bankruptcy may enable you to make your mortgage payments.
5. Deed in lieu of foreclosure: Essentially a mutually agreed foreclosure, the bank accepts the deed to your house in satisfaction of the loan.

1. Make sure that you have a written agreement with the bank that release you for the part of the loan that the sale proceeds don't cover.

1. The bank may require documentation of financial distress, such as medical bills, a layoff notice, or bank statements.
2. If you have more than one mortgage, or a home equity line, all lenders must agree to release you from the unpaid portion of the debt.
3. Short sales have the potential to create taxable income for the seller; check with a tax accountant or attorney for recommendations as to how best to structure the transaction to minimize any potential tax liability.