Can You Sell a Home in Mortgage Forbearance?

The COVID-19 pandemic left millions of homeowners struggling to keep up with mortgage payments. In response, many lenders offered mortgage forbearance programs, allowing borrowers to temporarily pause or reduce payments. But what happens if you need to sell your home while still in forbearance? Is it even possible?

This question is more relevant than ever as economic uncertainty lingers, inflation impacts household budgets, and housing markets fluctuate. Whether you’re facing financial hardship or simply looking to relocate, understanding the rules around selling a home in forbearance is crucial.

What Is Mortgage Forbearance?

Mortgage forbearance is an agreement between a borrower and lender that temporarily reduces or suspends mortgage payments. It’s not loan forgiveness—you’ll still owe the missed payments, but the lender provides flexibility during financial hardship.

Common Reasons for Forbearance

• Job loss or reduced income
• Medical emergencies
• Natural disasters
• Economic downturns (e.g., pandemic-related struggles)

Forbearance terms vary, but most programs last between 6 to 12 months, with options to extend if needed.

Can You Sell a Home During Forbearance?

The short answer: Yes, you can sell a home in forbearance. However, the process isn’t as straightforward as a traditional sale. Here’s what you need to know.

1. You Still Own the Home

Forbearance doesn’t transfer ownership to the lender. You retain the title, meaning you have the legal right to sell the property.

2. The Forbearance Agreement Matters

Some lenders include clauses that require repayment upon sale. Others may allow the missed payments to be rolled into the payoff amount when the home is sold. Review your agreement carefully.

3. You’ll Need to Settle the Debt

When you sell, the proceeds must first cover:
- The remaining mortgage balance
- Any missed payments (including interest, depending on the terms)
- Closing costs and realtor fees

If the sale price exceeds what you owe, you pocket the difference. If it doesn’t, you may face a short sale (more on that later).

Challenges of Selling During Forbearance

While selling is possible, there are hurdles to consider.

Credit Implications

Forbearance may impact your credit score, though recent federal guidelines (like those from Fannie Mae and Freddie Mac) have softened the blow. Still, lenders may scrutinize your financial history when approving a new mortgage.

Lender Approval Requirements

Some lenders require you to exit forbearance before selling. Others may demand a lump-sum repayment at closing. Always check with your servicer before listing the home.

Market Conditions Matter

If home prices in your area have dropped, selling might not cover your debt. In a hot market, you’re in a better position to break even or profit.

Options for Selling a Home in Forbearance

Depending on your situation, you may have several paths forward.

1. Traditional Sale with Full Payoff

If your home’s value exceeds what you owe:
- List the home normally.
- Use sale proceeds to pay off the mortgage (including deferred amounts).
- Keep any remaining equity.

2. Short Sale

If you owe more than the home’s worth, a short sale may be an option. This requires lender approval since they’ll accept less than the full loan amount.

Pros:
- Avoids foreclosure.
- Less damaging to credit than a foreclosure.

Cons:
- Lender must agree.
- May trigger tax liabilities on forgiven debt (though some exceptions exist).

3. Deed-in-Lieu of Foreclosure

If selling isn’t feasible, you might negotiate a deed-in-lieu—voluntarily transferring the property to the lender to avoid foreclosure.

Note: This still hurts your credit and is typically a last resort.

Steps to Sell a Home in Forbearance

Ready to move forward? Follow these steps:

1. Contact Your Lender

• Confirm whether selling is allowed under your forbearance terms.
• Ask about repayment requirements upon sale.

2. Get a Home Valuation

• Work with a realtor to determine a realistic listing price.
• Factor in any deferred payments or fees.

3. Prepare the Home for Sale

• Make minor repairs to maximize value.
• Stage the home to attract buyers.

4. Negotiate with Buyers

• Be transparent about the forbearance (it shouldn’t affect the sale, but full disclosure avoids complications).
• Ensure the sale covers your obligations.

5. Close the Deal

• Use proceeds to pay off the mortgage (including deferred amounts).
• Settle any remaining fees or liens.

Legal and Tax Considerations

Potential Tax Consequences

• Forgiven debt in a short sale may be considered taxable income (though the Mortgage Forgiveness Debt Relief Act provides exceptions in some cases).
• Consult a tax professional to understand liabilities.

Foreclosure vs. Forbearance Sales

• A foreclosure is worse for your credit than a sale during forbearance.
• Selling proactively helps you maintain more control over the process.

Final Thoughts

Selling a home in forbearance is entirely possible, but it requires careful planning. By understanding your lender’s policies, market conditions, and legal implications, you can navigate the process successfully. If you’re unsure, consulting a real estate attorney or financial advisor can provide clarity.

The key takeaway? Don’t wait until forbearance ends—explore your options now. Whether you choose a traditional sale, short sale, or another route, taking action can help you move forward financially.