The letter from the lender says one number. The Zillow estimate says another. And somewhere between the second mortgage you took out for the roof, the back taxes that have been quietly stacking up, and what an agent told you the house would actually sell for, you have started to suspect that selling would not pay off what you owe. That is what "underwater" means: the payoff on everything secured against the house is more than the house would sell for, after the cost of selling it.
This guide is for homeowners in Scranton, Wilkes-Barre and the rest of Northeast Pennsylvania who are in that spot or think they might be. It covers how to find out for certain, the realistic ways out, how a short sale works here, whether a Pennsylvania lender can still come after you for the difference, and the tax question almost nobody asks until a 1099-C arrives in January.
Being underwater does not stop you selling, but it means the gap has to be paid or forgiven at closing. A short sale is the lender agreeing to take less than the payoff, and every lienholder has to sign off. Approval releases the lien. It does not automatically erase the leftover debt, so the words in the approval letter matter more than anything else in the file. Pennsylvania's Deficiency Judgment Act protects you after a sheriff's sale, not after a short sale. And forgiven debt can be taxable federally, so talk to a tax preparer before you sign.
First, Find Out Whether You're Actually Underwater
A lot of people who think they are underwater are not, and some who think they are fine are. The only way to know is to put two real numbers side by side.
What you owe is the payoff, not the balance. The principal balance on your monthly statement leaves out accrued interest, late charges, escrow shortages and, if you are behind, foreclosure fees and costs. Ask the servicer for a written payoff statement good through a date about a month out. Then add everything else that has to be cleared before a title company will close:
- A second mortgage or home equity line. These are the most common reason an NEPA house ends up underwater, because the first mortgage alone would have been fine.
- Delinquent property taxes. In Lackawanna and Luzerne counties these go to the county Tax Claim Bureau and are paid out of proceeds at closing. Our Lackawanna County tax sale guide and Luzerne County tax sale guide explain how the claim grows the longer it sits.
- Judgments, municipal claims and other liens that have attached to the property. We cleared one on a Wilkes-Barre two-unit sold out of an estate, where a debt nobody was thinking about had clouded title.
What the house is worth is what a buyer will pay, not the assessment. Lackawanna County's reassessment put a new number on every tax bill, but that number is for taxes, not a sale price. We explain the difference in what the Lackawanna reassessment means if you're selling. A local agent's comparative market analysis, or a written cash offer, gives you a real figure. Then take off what it costs to sell: commission if you list, your share of transfer tax and settlement charges, and any repairs a financed buyer's inspector will demand. Houses with mine subsidence damage or a wet basement often lose more at that step than their owners expect.
If the payoff total is higher than that net figure, you are underwater. If it is lower, you have equity, even if it is thin, and most of what follows is less urgent.
Your Options When You Owe More Than It's Worth
There are five realistic paths, and which one fits depends mostly on how big the gap is and whether you are already behind on payments.
- Cover the gap yourself. If the shortfall is a few thousand dollars, the simplest sale is an ordinary one where you bring the difference to settlement. No lender approval, no waiting on a loss mitigation department.
- Stay and wait. If you are current on the mortgage and the problem is only value, time and principal payments close the gap. A loan modification or other help may be available if you are behind. Our Pennsylvania foreclosure guide covers the Act 91 notice and HEMAP.
- Short sale. Your lender agrees to accept less than the full payoff so the house can sell. This is the main subject of this guide.
- Deed in lieu of foreclosure. You sign the house over to the lender instead of selling it. Lenders usually want a clean title for this, so a second mortgage or other liens can rule it out.
- Let it go to sheriff's sale. This is the path most people are trying to avoid. Pennsylvania foreclosure runs through the county Court of Common Pleas, and it ends with the house auctioned by the sheriff. See our selling during foreclosure page for how the timeline works in Lackawanna County.
If you are divorcing and neither spouse can refinance the other out, the same arithmetic applies. The gap still has to be paid or forgiven, and selling during a divorce adds a second signature to every step.
How a Short Sale Works in Pennsylvania
A short sale is a normal sale with an extra party at the table. You find a buyer and sign an agreement of sale, the same way you would on any sale. The agreement is made subject to lender approval, and the closing cannot happen until the lender, or every lender, signs off on the numbers.
What the lender will usually ask for:
- A hardship explanation. Job loss, divorce, death, illness, a move, a payment you can no longer carry. Lenders want to know why you cannot pay the shortfall.
- Financial documents. Pay stubs, bank statements, tax returns. The lender is deciding whether to forgive money and wants to see that you cannot simply pay it.
- The signed agreement of sale and a draft settlement statement showing what the lender would net.
- Its own opinion of value. The lender will commonly order an appraisal or broker's price opinion. If it thinks the house is worth more than the contract price, it may counter or refuse.
Every lienholder has to agree. This is where most short sales in this area get stuck. The first mortgage lender controls most of the money, but a second mortgage or HELOC lender stands to recover little or nothing and still has to release its lien. Each one negotiates separately, and each one can say no.
Don't assume the foreclosure stops while you wait. If a foreclosure complaint has already been filed, ask the servicer in writing whether the sheriff's sale will be postponed while it reviews the short sale, and keep the answer. A sale that closes a week after the sheriff's sale does not help you.
Not Sure Where You Stand?
Send us the address and your payoff figure. We'll tell you honestly whether a cash sale covers it, and if it doesn't, what your other options look like. No obligation, no fees.
Will You Still Owe the Difference?
This is the question that matters most, and it is the one sellers most often get wrong. When a lender approves a short sale, it agrees to release its lien for less than the payoff so the buyer gets clear title. That is not the same as agreeing that you no longer owe the rest. The leftover amount is called a deficiency, and whether it survives depends on what the lender puts in writing.
- Look for waiver language. An approval letter that says the remaining balance is waived, forgiven, or accepted in full satisfaction of the debt is what you want. One that only says the lender will release its lien upon receipt of the agreed funds may leave the rest of the debt alive.
- Ask before you sign, not after. Once the sale closes you have given up the house, which was your only leverage. If the waiver is missing, ask for it while the lender still wants the deal to close.
- Watch for a promissory note or cash contribution request. Some approvals are conditioned on you signing a new unsecured note or paying a sum at closing. That may be acceptable, but know that it is what you are agreeing to.
Pennsylvania does give homeowners real protection, but it is tied to the sheriff's sale. Under the Deficiency Judgment Act, 42 Pa.C.S. § 8103, when a house is sold to the lender in execution proceedings for less than the judgment, the lender has to petition the court to fix the property's fair market value before it can collect the balance, and you are credited with that value rather than the auction price. The petition has to be filed within six months of the sale. If it isn't, you can petition to have the judgment marked satisfied, and the statute makes any agreement to waive those protections void. A short sale is a private sale, not an execution sale, so this statute is not what protects you there. The letter is.
None of that makes a sheriff's sale the better choice. A foreclosure goes through the courthouse, takes the house, and still leaves the deficiency question open. It is a reason to read your short sale approval carefully, and to have a Pennsylvania real estate attorney read it too.
Taxes on Forgiven Mortgage Debt
When a lender forgives part of a debt, the IRS generally treats the forgiven amount as income, and the lender may send you a Form 1099-C for it. For years there has been a special exclusion for forgiven debt on a main home, known as qualified principal residence indebtedness. IRS Publication 4681 describes it as covering discharges before 2026. Congress has let that exclusion lapse and revived it before, and a bill to make it permanent has been introduced, so whether a 2026 short sale qualifies is something to check against current law with a tax preparer, not assume.
Other exceptions can still apply. The best known is insolvency: if your debts exceeded your assets immediately before the debt was forgiven, some or all of the forgiven amount can be excluded. That is a calculation, not a guess, and it is worth paying someone to run it.
The Pennsylvania side is simpler for most homeowners. The Department of Revenue's Personal Income Tax Guide says that cancellation of recourse debt that is personal in nature is not reportable income for Pennsylvania personal income tax. A mortgage on the house you live in is the usual example. Debt on a rental property is treated differently, and landlords should read our rental property tax guide and talk to their accountant first.
Where a Cash Buyer Fits, and Where It Doesn't
We would rather tell you this up front. If you are underwater, a cash sale to us is not likely to fix the gap on its own. An as-is cash offer is usually below what the house would bring on the open market after repairs, because we are taking on the repairs, the holding costs and the risk. We show that math in how cash offers are calculated in NEPA, and our comparison of selling options sets it against listing.
Where a cash sale can help:
- You're close to even. If our offer comes within a small gap you can cover, a quick closing with no repairs and no commission can net you more than a listing that costs six months of payments.
- The house needs work a financed buyer's lender won't accept. Short sale lenders still need a buyer who can close. We can be that buyer, subject to the lender approving the price.
- Time is short. If a sheriff's sale date is set, the question is often which option can actually close before it.
We buy houses across Scranton, Wilkes-Barre and the rest of Northeast Pennsylvania. If you call, have your payoff statement in front of you and we will give you a straight answer, including when the answer is that listing is the better fit. More common questions are on our FAQ page, or call (570) 433-9191.
This article is general information about Pennsylvania real estate, short sales and taxes and is not legal or tax advice. Statutes and IRS guidance change; confirm your situation with a Pennsylvania real estate attorney and a qualified tax preparer, and contact a HUD-approved housing counselor if you are behind on your mortgage.
