Selling your home when the property value is less than what you owe on the mortgage can be difficult. Here’s what I suggest.

Q: We have a mortgage that has been sold several times over the years. We have recently obtained a copy of the mortgage from our lender. I’m trying to find a reasonable means of managing financially by downsizing and looking into selling our home. Naturally we will probably still owe some portion as it will not likely sell for the amount we owe.

There are three separate lots of about 4000 square feet each. When we took out the mortgage, we were specific with our lender that we were only going to mortgage one of the lots, the one that has a home on it. When we originally received the mortgage, I checked it and there was only one in the description. However, I never checked to make sure it was the correct lot, although the address is correct the lot is not. The description has the empty/vacant lot, not the one that our house is actually on.

We are underwater and reaching retirement soon without any means for retirement other than social security and unfortunately it won’t be enough. Our mortgage rate is 7.5 percent, and we still owe $150,000 on a loan that we took out for $200,000.

Properties around here lost their values shortly after we bought. Well, you know the story. We’re just overwhelmed and unsure of how we’re going to make this work. What recourse do we have?

A: What you are describing is a mistake that the lender made when you took out your mortgage. The lender gave you a $200,000 loan and should have secured that loan with a mortgage on the land that had the house. It seems as though you’ve just discovered that the mortgage is on an adjacent vacant lot.

Well that is a problem – for the lender. If the lender must foreclose on the home, the lender will have big problems. The lender’s lien and legal rights are against the vacant lot and not the land with the home. If the lender wants to move forward to secure its rights against the home it will need to clean up the paperwork. Having said that, you have only given us part of the story. As part of the original loan application, you must have completed paperwork. That paperwork must have shown that the lender’s intent and your intent related to the property that has the home.

The lender has the ability to take corrective action to fix this mistake, but for your purposes, the issue isn’t the mistake itself but what to do now that the property’s value is below what you owe on the mortgage.

Let’s focus on that.

As we’ve written in the past, you need to contact your lender and see if there are any mortgage modification plans that may be available to you. The lender may have the ability to refinance your loan or modify the terms of your loan by giving you a lower interest rate. In limited circumstances, the lender may have other plans available to adjust the terms of your loan that could improve your situation. But, you need to talk to someone in the right department at the bank that has the authority to discuss with you the plans available.

(As an aside, we wish you had done this several years ago, when lenders were given financial incentives to lower interest rates and reduce loan balances.)

We suggest you see if the bank’s website has any information that might be useful to you. Frequently lenders have better information on their websites than what their agents know when you talk to them. If you get lucky and get someone smart and helpful, you’re in luck. Otherwise, this is a hard game to play.

You may also try to sell the home and see what kind of money you can get. If you list your house and get some interested buyers, even if the buyer offers less than what you owe on the mortgage, you might get the lender to accept the lesser amount in full satisfaction of the debt that you owe.

You’d go through what’s known as a short sale with the lender. The lender would take whatever proceeds it could from the sale of the home. You’d be released from the debt owed to the bank. Your credit history would take a big hit and your credit score would decline substantially. But, you’d be able to move on with your life.

Some homeowners are not inclined to go through the short sale process. If you want to stay in the home, you might be able to refinance with another lender. But you’ll need cash to pay down the loan to a point that it is refinanceable.

That could be quite a bit of money. You’d end up with a much lower interest rate and lower monthly payments but end up out of pocket for whatever it would take to pay down the debt owed to your current lender.

You need to get a lot more information before you decide which way to go. Talk to a local mortgage lender or broker and have them walk through the specific numbers with you. But don’t apply for a loan. Don’t give them your social security number. Just sit down and talk and go over your options.

If they need to see your credit history or a credit score, you can get your credit history for free from and you may be able to get your credit score for free from your credit card company, if they offer the service. If not, then you can pay a small amount on and get it there. The credit history and score you get won’t be exactly what the mortgage lender or mortgage broker use, but it should help them gauge your credit worthiness in determining where you stand and what your options might be.

Let us know how it goes. Good luck.