What is the term for when a borrower sells their property for less than the loan balance to avoid foreclosure?

The term for when a borrower sells their property for less than the amount owed on the mortgage, often to avoid foreclosure, is known as a short sale. In a short sale, the lender must agree to accept the reduced proceeds from the sale as full settlement of the loan, which typically happens when the property’s value has decreased significantly, making it difficult for the borrower to pay off the mortgage. This process can provide the borrower with the ability to sell the property, satisfy their debt to the lender, and avoid the more damaging credit consequences associated with foreclosure.

In contrast, foreclosure refers to a legal process where a lender takes possession of a property due to the borrower's failure to make mortgage payments. An equity sale usually involves selling a property for more than the loan balance, allowing the seller to realize profit from their investment. A loan modification is a change made to the terms of an existing loan, typically intended to make it easier for the borrower to manage their payments without selling the property.