Selling a Richmond-Area Home When You Owe More Than It Is Worth: Short Sale, Deed in Lieu or Keeping It

Published October 30, 2026 | Written by the Mission Realty Team.

If you owe more on your mortgage than your home would sell for, you can still sell, but someone has to cover the gap, and your lender has to agree if it is not you. Your three main paths are a short sale, a deed in lieu of foreclosure, or keeping the home while you work something out with your servicer. Each has different effects on your credit, on whether you owe the difference afterward, and on your taxes. This guide draws on the Consumer Financial Protection Bureau (CFPB), Fannie Mae’s servicing guide, the IRS and the Code of Virginia, and it applies whether your house is in the city, Henrico or Chesterfield.

Step one: know what you owe and what it would sell for

“Underwater” means your payoff is higher than the price a buyer would pay after selling costs. You need two numbers: the payoff your servicer would quote, and a realistic market value. Our post on payoff letters and per diem interest explains the first, and the post on a seller net proceeds sheet line by line explains what a net sheet is and which costs come out of a sale. Add every loan on the home, including a second mortgage or home equity line, because each lender has a say.

Option one: a short sale

The CFPB defines a short sale as a sale of your home for less than you owe. It is an alternative to foreclosure, but because it is a sale, you will have to leave. The CFPB’s foreclosure options page says you find the buyer, and you need approval from your mortgage servicer and the owner of the loan. If you have other mortgages on the home, you need approval from those servicers too, and the CFPB says to request a loss mitigation application, send a complete package and understand the terms, including tax effects.

The question that matters most is the deficiency, the amount still owed after the sale. The CFPB says that in some states a lender could sue after a short sale to collect it, so you should ask the lender to waive the deficiency and get the waiver in writing. We did not find a Virginia statute in the sections we read that answers the question for every loan, so treat the written waiver as the thing to get.

Fannie Mae’s servicing guide shows what a servicer must do on a loan Fannie Mae owns. For a short sale, the servicer must advise you of the advantages and disadvantages, include a contingency in the sales contract making the sale subject to the mortgage holder’s approval, and release you from liability for any deficiency on loans without mortgage insurance, or where the insurer has granted Fannie Mae authority. A principal residence is entitled to a $7,500 relocation incentive after a completed short sale, with exceptions, and the servicer may ask for a cash contribution if your reserves are above set limits. Payments to junior lienholders from the proceeds are capped at $6,000 in total, and homeowners association liens, judgments and mechanic’s liens cannot be paid from that amount. These rules apply to Fannie Mae loans only. Freddie Mac, FHA, VA and bank-held loans have their own rules that we did not review, so ask your servicer who owns your loan.

Option two: a deed in lieu of foreclosure

With a deed in lieu, the CFPB says you turn ownership of the home over to your servicer and move out, and you are not responsible for selling it. Qualifying could mean you do not owe the deficiency, and you must apply through loss mitigation and be approved. Fannie Mae’s guide, which calls its version a Mortgage Release, adds that the servicer must be able to convey clear and marketable title, that junior lien releases must be obtainable, and that the property generally must be vacant and broom swept unless you qualify for a transition option. It also refers borrowers to IRS Publication 544 for the tax effects of forgiven debt.

A deed in lieu is worth asking about when you do not want to manage showings and offers. It is a poor fit if there are judgments or other liens a lender will not clear. Our post on judgment liens and lis pendens in a Richmond sale explains how those can block a closing.

Option three: keep the home and work with your servicer

If you can afford the payment, you may not need to sell at all. The CFPB lists refinancing, a loan modification and forbearance as options to stay in the home, and says the worst thing is to do nothing. A modification changes the loan terms and may add missed payments to the balance. Forbearance pauses or reduces payments for a limited time, but the missed payments are not forgiven. If you are behind, contact your servicer and a HUD-approved housing counselor right away. The CFPB says the HOPE Hotline is open 24 hours a day at (888) 995-4673.

Taxes on forgiven debt

This is the part sellers miss. The IRS says in Topic 431 that canceled debt is generally taxable and that a lender may send a Form 1099-C. The page lists exclusions, including debt canceled in bankruptcy and debt canceled to the extent you are insolvent. It lists an exclusion for canceled qualified principal residence debt only if the debt was discharged before January 1, 2026, or under a written arrangement entered into before that date. When we read the page on October 29, 2026, it showed that date, so do not assume the exclusion applies to a 2026 or later sale until a tax professional confirms. Excluded amounts are reported on Form 982.

Who you need on your side

• A HUD-approved housing counselor to help you work with your servicer, at no cost per the CFPB.
• A Virginia attorney if there is a second mortgage, a judgment, or a foreclosure notice. Under section 55.1-321 of the Code of Virginia, the trustee or lender must give the owner written notice of the time, date and place of a proposed sale under a deed of trust.
• A tax professional to answer the cancellation of debt questions above.
• A listing agent who has handled lender approvals, since a short sale adds weeks of paperwork. See how a normal Richmond sale runs for the baseline, and our seller page for how we work.

If you are thinking about buying again later, read our post on waiting periods after bankruptcy or foreclosure before you decide, and ask your lender how a short sale or deed in lieu would be treated.

Frequently asked questions