Housing Counselor Certification (HUD) Practice Exam

Which option allows the borrower to avoid foreclosure by disposing of a property for an amount less than the outstanding mortgage balance?

1. Loan Modification

2. Short Sale

3. Home Equity Line

4. Foreclosure Deferment

The correct answer is: Short Sale

A short sale is an arrangement where a borrower sells their property for less than the amount owed on the mortgage, with the lender's approval. This process allows the borrower to avoid foreclosure by effectively transferring the ownership of the property to a buyer who is willing to purchase it, even though the sale price doesn't cover the entire mortgage loan. By participating in a short sale, the borrower can mitigate the negative consequences associated with foreclosure, such as a damaging impact on their credit score and the stigma of foreclosure. In contrast, other options like loan modification involve changing the terms of the mortgage to make the payments more manageable, which does not directly involve selling the property. A home equity line is a loan option that allows homeowners to borrow against the equity they have in their homes and does not address avoiding foreclosure through sale. Foreclosure deferment is a temporary suspension of the foreclosure process but does not involve selling the property and therefore would not help in disposing of the property to prevent foreclosure. Thus, the choice of a short sale is directly aligned with the goal of avoiding foreclosure while managing financial difficulties.