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What Happens to your Mortgage If You Sell Your Home for Less Than You Owe?

During the mid-2000s, the American housing market enjoyed a period of unprecedented growth. As the value of new and existing homes rose, millions of American families enjoyed a wave of property-fueled wealth. Many homeowners took out low-interest home equity loans on the assumption that their homes' values would continue to skyrocket. Every homeowner who did this effectively borrowed against the expected future value of his or her home. Given the steady upward trajectory that the U.S. housing market enjoyed during the first six years of the 2000s, this seemed like a relatively safe bet.

Unfortunately, home prices eventually crested and fell. This caused the now-infamous financial crisis and dropped the U.S. into a deep recession from which it has yet to make a full recovery. Thanks to heroic efforts on the part of various government agencies and business leaders, the country avoided a worst-case economic collapse that would have rivaled the Great Depression in depth and scope.

Nevertheless, the recession was long and painful. One of its principal side effects was the glut of foreclosed homes that blighted many once-thriving communities. Many of these homes entered foreclosure after their owners became unable to cover their monthly mortgage payments. In most cases, this was the result of job losses, working-hour reductions or other economic pressure.

In others, it was the result of rapid local home-price drops. Many homeowners who suddenly realized that their homes were worth less than the outstanding balances on their mortgages were tempted to abandon their properties and accept the financial consequences. At first blush, this seems like a logical response to such a situation: When a mortgage is "underwater," its holder can't possibly pay it back using the proceeds from the sale of his or her home. Since he or she probably can't afford to pay the difference between the loan's outstanding balance and the home's sale value, he or she has no incentive to try to sell the home. In this circumstance, the most prudent course of action may be to abandon the home.

If you're in this position, you'll need to weigh your options before deciding to walk away from your home. If you do choose to abandon your "underwater" home, you'll need to accept the possibility that your credit score will suffer significant damage. To avoid this outcome, you should contact a lawyer who specializes in "short sales." This is a type of managed foreclosure that may enable you to remain in good standing with your mortgage lender.

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