An underwater mortgage is when the balance of the mortgage loan is higher than the fair market value of the property. This value deficiency forces homeowners to discontinue their mortgage payments and ultimately face a bank foreclosure. However, a bank can still sue a property owner for the deficiency amount or negative difference between the mortgage amount and the foreclosed sale price of the home.

To avoid a deficiency suit, homeowners should negotiate a short sale – a mutually acceptable sale price and deficiency amount waiver from their lender. A short-sale requires lender approval and each have their own restrictions. If your lender agrees to a short sale, the process is often very long.

While a short sale won’t allow you to keep your home, it can substantially reduce the damage to your credit. However, there are a number of considerations to take into account. For example, the waived amount from a short-sale becomes taxable income. It is important that homeowners also understand their short-sale tax implications.