Can I Sell My House if I’m Behind on Payments?

2. If the house is worth less than you owe (underwater)

When you owe more on your mortgage than your home’s current market value, selling can be more challenging. In this case, there are options like a short sale that may help you avoid foreclosure and minimize the financial impact of selling an underwater property.

Selling option: Short sale

A short sale involves selling your home for less than the remaining mortgage balance, but must have your lender’s approval. While it doesn’t clear your debt completely, it can help you avoid foreclosure and potentially reduce the financial burden of an underwater mortgage. Short sales can be time-consuming since they require lender cooperation, but they may provide a viable solution for underwater homeowners.

Tips for a short sale

• Work with an experienced agent: Short sales are complex, so having an agent familiar with the process can improve your chances of success.
• Prepare documentation for the lender: Lenders often require proof of financial hardship, like job loss or medical expenses. Gather any documents showing why a short sale is necessary.
• Be patient with the process: Short sales can take longer than traditional sales, as lenders review and approve offers. Staying organized and responsive can help smooth out the process.

Credit impact: short sale vs. foreclosure

Most lenders will alert credit bureaus after a mortgage payment is 30 or more days late. If payment is still not received, they will typically wait 90 days to begin foreclosure proceedings.

In other words, a foreclosure usually occurs only after you miss at least four successive monthly mortgage payments — or about 120 days of delinquency. This will leave a negative mark on your credit report that can remain for up to seven years after you miss your first payment.

According to Consumer Education Services, the higher your credit score, the more impact a foreclosure can have. Below is an at-a-glance look at how you might be impacted by a foreclosure:

• If you had a “Good” credit score: You may see a drop of 100 points or more
• If you had an “Excellent” credit score: You may see a drop of up to 160 points
• Borrowing consequences: Expensive interest rates and limited credit on future loans
• Possible tax consequences: Debt cancellation may be taxable as ordinary income, depending on your situation.
• Time to restore credit score: 3 years or more of on-time payments
• Time to remove foreclosure from your credit history: 7 years (typically)

 

A short sale typically has a less damaging effect on your credit score than a foreclosure, but the extent of the impact depends on your credit history and other factors. Some lenders may report a short sale as “settled” or “paid as agreed,” which can soften the effect on your score compared to foreclosure.

In short, while both options affect credit, a short sale is generally less damaging than foreclosure, making it a preferable choice when feasible.

Ways to avoid selling your house when behind on payments

If selling your home doesn’t feel like the right choice, there are options that may allow you to stay in your home while addressing your missed payments. Here are several ways to possibly manage mortgage debt without selling.

Request a mortgage forbearance

Mortgage forbearance lets you temporarily pause or reduce your mortgage payments if you’re experiencing financial hardship. Lenders may allow this option to help you recover financially, but you’ll need to catch up on the missed payments after the forbearance period ends.

Negotiate a loan modification

A loan modification involves changing the terms of your mortgage to make payments more affordable. This might mean extending the loan term, lowering the interest rate, or even reducing the principal amount owed. Your lender will need to agree to this adjustment, but it can be an effective way to regain control over your payments.

Refinance your mortgage

If you qualify, refinancing your mortgage can lower your monthly payments by securing a better interest rate or extending the loan term. Although this option isn’t available if you’re too far behind, it can provide relief for those with improving financial stability.

Rent out your home

Renting out your home can generate income to cover your mortgage payments, allowing you to keep the property and avoid selling. This may work well if you can find a reliable tenant and manage the responsibilities of being a landlord, even on a temporary basis.

File for bankruptcy

Bankruptcy is typically a last resort option, but it may be appropriate for homeowners with significant debt who wish to stay in their homes. Chapter 13 (sometimes called wage-earners bankruptcy), in particular, can help restructure your debts, allowing you to make manageable payments and keep your house. Chapter 7 bankruptcy is the filing for people who don’t have income to pay debts. Consult with a bankruptcy attorney to understand the implications and whether this is a viable path for you.

Learn more about avoiding foreclosure

The U.S. Department of Housing and Urban Development (HUD) maintains an online resource page where you can find tips on avoiding foreclosure or determining if you are at risk of foreclosure.

You can also call the Federal Housing Administration (FHA) for additional information through the National Servicing Center at 877-622-8525 or through the FHA Outreach Center at 800-CALL FHA (800-225-5342) or email answers@hud.gov.

Should I sell my house if I’m behind on payments?

Deciding whether to sell your home when you’re behind on payments largely depends on your financial goals and circumstances — especially whether you are above water or underwater in your mortgage. Selling may allow you to pay off your debt and move forward, but there are also options that might allow you to stay in your home.

If you decide to sell, partner with a real estate agent who has a proven track record in helping homeowners in your situation. HomeLight can connect you with trusted top agents in your market. We analyze over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs.

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