Owe more than the house is worth? Short sale or deed in lieu in Florida and Arizona

When you owe more than the house can sell for

Add up everything secured by the house: the first mortgage, any second mortgage or home equity line, and any liens. Then look at what the house would sell for today, after repairs and selling costs. If the debts are bigger, a normal sale cannot pay them off at closing, because the title company must pay each lender before it can give the buyer clear title.

You still have choices. You can keep paying and wait, ask the lender to change the loan, sell for less than you owe with the lender's approval, or give the house back to the lender. This guide covers the last two: the short sale and the deed in lieu of foreclosure. It explains how they work. It gives no legal or tax advice, so check your own case with a lawyer and a tax adviser in your state.

What a short sale is

The Consumer Financial Protection Bureau describes it this way: "A short sale, which is a type of loss mitigation, is a sale of your home for less than what you owe on your mortgage." Loss mitigation is the lender's word for any plan that avoids or reduces the loss of a foreclosure.

You find a buyer, sign a contract with them, and send the contract to your lender with your financial papers. The lender decides whether it will accept the sale price. Until it says yes in writing, the sale cannot close. If there is a second mortgage, a home equity line or another lien, each of those holders must agree too, since each one has to release its claim on the house.

The lender reviews your papers and the price before it decides. Plan for that review time when you agree on a closing date with the buyer.

• A hardship letter: why you cannot keep paying
• Income: pay stubs, benefit letters, tax returns
• Bank statements
• The signed purchase contract
• An estimate of the closing statement, showing what each lender would receive

What a deed in lieu is

The CFPB says "a deed-in-lieu of foreclosure is an arrangement where you voluntarily turn over ownership of your home" to the lender to avoid foreclosure. It "may be an option if you are trying to move out of your home."

There is no buyer to find. You apply to the lender, the lender checks the title and the house, and if it agrees, you sign a deed to the lender and move out by an agreed date. Ask the lender what it needs first. A lender may want the house empty and the title clear of other liens, which is harder when there is a second mortgage or another lien.

The CFPB also says to "make sure that it covers the entire amount of money you still owe on the mortgage loan." Read the agreement for that wording before you sign.

The debt left over: the deficiency

When the house brings less than you owe, the difference is called the deficiency. The CFPB warns that depending on your state, you may be responsible for it, and that some lenders could sue to collect it after a short sale. Its advice: ask the lender to waive the deficiency before you complete the sale, and "if the lender waives the deficiency, get the waiver in writing and keep it for your records."

State law sets limits, and the two states differ.

A short sale in Arizona needs its own waiver

Arizona's protections in sections 33-814(G) and 33-729(A) are written for a trustee's sale and for a foreclosure of a purchase loan. A short sale is neither. It is a sale you agree to with the lender, so the lender's written short sale approval decides whether you still owe the difference.

Before you sign, look for a sentence that releases you from any remaining balance. If it is missing, ask for it. If the lender will not give it, talk to an Arizona lawyer before you close.

If Fannie Mae owns your loan

Fannie Mae owns some home loans, and a servicer, the company you send payments to, handles them. Fannie Mae's Servicing Guide, section D2-3.3-01 (dated August 13, 2025), sets its short sale rules. Three of them matter most to a seller.

Ask your servicer whether Fannie Mae or Freddie Mac owns your loan. The rules of the loan's owner decide what the servicer can offer.

• Deficiency: "The servicer must release the borrower from liability for any deficiency" after a successful short sale, for loans with no mortgage insurance or with mortgage insurance handled under Fannie Mae's delegated rules.
• Moving help: after a successful short sale, "the borrower is entitled to an incentive payment of $7,500 from Fannie Mae to assist with relocation expenses," unless one of the listed exceptions applies.
• Cash contribution: the borrower may be asked to pay toward the shortfall when non-retirement savings are over $10,000. The requirement is waived when the amount would be less than $500.
• Paperwork: every party signs a Short Sale Affidavit at closing.

Taxes on canceled debt

When a lender forgives debt, the IRS can treat it as income. IRS Publication 4681 (for 2025 returns) says that if you receive a Form 1099-C, "that means an applicable entity has reported an identifiable event" to the IRS. Whether you owe tax depends on the exclusions.

Two exclusions matter for homeowners. First, "qualified principal residence indebtedness can be excluded from income for discharges before January 1, 2026." For debt canceled after December 31, 2025, the publication says this exclusion does not apply. Second, you do not include canceled debt in income "to the extent that you were insolvent immediately before the cancellation," which means your debts were bigger than everything you owned.

Excluded debt is reported on Form 982, attached to your return. The rules differ for recourse debt, which you are personally liable for, and nonrecourse debt, which you are not. Ask a tax adviser before you close, and ask whether any law passed after the publication changed the home loan exclusion.

The federal rules that protect you during review

Federal mortgage servicing rules in Regulation X, section 1024.41, set deadlines for your servicer once you apply for help. The dates count from the foreclosure sale, so applying early gives you the most protection.

More on the 120-day rule →

Short sale, deed in lieu or foreclosure: how they compare

Each path ends with you leaving the house. They differ in time, control and what is left over.

Steps to take this week

Start now. Each month adds interest and late fees to what you owe, and each step of a foreclosure shortens the time left for a short sale.

• Call your servicer and ask for a loss mitigation application. Ask who owns the loan.
• Get a payoff statement for every loan and lien on the house.
• Find out what the house would sell for as it is today.
• Send the complete application, and keep proof of the date you sent it.
• If a foreclosure case or a trustee's sale date already exists, talk to a lawyer now.
• Ask in writing whether the lender will waive the deficiency, and keep every letter.

Behind on payments or facing foreclosure →

Second mortgages and other liens

A short sale has to clear every lien on the house, and each lien holder must sign a release. The first mortgage lender approves the whole closing statement, so it also decides how much of the sale money a second mortgage or a home equity line may receive.

Fannie Mae limits what the second lien holders can receive in its short sales. Its Servicing Guide section D2-3.3-01 says: "Payments from the sales proceeds to all subordinate lienholders to facilitate lien releases must not exceed $6,000." That is the total for all of them together, and each payment must come with a lien release and a full release of your liability.

If a second lien holder asks for more than the first lender allows, the sale can stop. Ask each lien holder early what it will accept, and get every answer in writing.

• First mortgage: the lender that approves the short sale price
• Second mortgage or home equity line: must release its lien
• HOA or condo association liens: paid or released at closing
• Judgment liens and tax liens: paid or released at closing
• Code enforcement liens: paid, reduced or released by the city or county

How long the lender has to answer

A short sale offer sits with the lender until it decides. For Fannie Mae loans, section D2-3.3-01 sets two clocks for the servicer. It must acknowledge an initial short sale offer within five business days, and it must respond "within 30 calendar days of receipt of a complete BRP, if required, and an initial short sale offer." BRP means the borrower response package, the papers you send with your application.

Other loan owners set their own times. Ask your servicer in writing how long it takes to answer a short sale offer, and tell your buyer so the contract dates leave room for it.

You cannot keep money from a short sale

In a short sale, every dollar goes to the lenders and the closing costs. Fannie Mae's guide says: "The borrower or the purchaser must not receive any funds or commissions from the sale of subject property." The one exception is a relocation payment from Fannie Mae or another acceptable source.

All parties also sign a Short Sale Affidavit at closing. It confirms the sale terms are the ones the lender approved, with no side deals between the seller and the buyer. A buyer who offers you cash outside the closing, or a promise to rent the house back to you or sell it back later, is asking you to break those terms.

If the FHA insures your loan

An FHA loan has its own short sale program, called a Pre-Foreclosure Sale. HUD's form HUD-90045 (September 2016), the approval letter servicers send to homeowners in the program, sets out the terms. Ask your servicer for the current version, because the program's terms can change.

• The house must be listed with a licensed real estate broker or agent unrelated to you within 7 days of the letter.
• "The standard marketing period for a PFS listing is 4 months from the date of this letter."
• The amount paid to HUD after allowable costs must be at least 88% for a sale in the first 30 days, 86% for days 31 to 60, and 84% for the last 60 days.
• "The sale must be an arm's length transaction; the buyer cannot be a member of your family, business associate, or other favored party."
• Owner-occupants who are not required to make a cash contribution and sell successfully are relieved of the mortgage obligation and may receive an incentive of up to $3,000, part of which can pay junior liens.

A short sale, step by step

Lenders use their own forms. Here is a typical order of steps for a short sale.

Buying a home again later

A short sale or a deed in lieu affects when you can get a new mortgage. Fannie Mae's Selling Guide section B3-5.3-07 sets waiting periods for loans it buys, counted from the date the event was completed.

FHA, VA and other lenders set their own periods. If you plan to buy again, ask a lender before you choose between a short sale, a deed in lieu and letting the foreclosure run.

Watch for relief scams

Owners who are behind on payments are targets for scams. The Federal Trade Commission says "it's illegal for a company to charge you a penny until it's given you a written offer" for relief from your lender, and you accept it. It warns that scammers demand payment up front, may ask to be paid only by cashier's check, wire transfer or a mobile payment app, and "may try to convince you to transfer the deed to your home to them." "If you transfer the deed, you're not likely to get it back."

Talk to your servicer directly, and sign a deed only at a closing run by a licensed title company or a lawyer.

How to check a cash buyer before you sign →

Words you will see in the lender's letters

Lender letters use their own words. Here is what the common ones mean.

How BIMINIO can help when you owe more than the house is worth

BIMINIO buys houses for cash in Tampa, Miami, Orlando and Lakeland in Florida, and Phoenix and Glendale in Arizona. When the loan is bigger than our offer, the sale can only close as a short sale, with your lender's written approval of the price.

We send a written offer within 24 hours, with the comparable sales we used and proof of funds. You can send it to your lender with your short sale papers. A cash offer is below full market value, and your lender decides whether to accept the price. We charge no fees, we pay the closing costs, and you pick a closing date from 7 to 35 days after the lender approves.

Facing foreclosure in Florida: sell before the sale date →