How to Sell a House That’s Underwater: Here are the Best 6 Options
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Presley Attardo, Contributing AuthorClose
Presley Attardo Contributing AuthorPresley is a Seattle based writer covering interior design trends, home improvement, and market updates. She has lived in San Francisco, Los Angeles, Chicago, and Washington, D.C., giving her a unique perspective on the diversity of U.S. real estate.
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Sam Dadofalza, Associate EditorClose
Sam Dadofalza Associate Editor
Sam Dadofalza is an associate editor at HomeLight, where she crafts insightful stories to guide homebuyers and sellers through the intricacies of real estate transactions. She has previously contributed to digital marketing firms and online business publications, honing her skills in creating engaging and informative content.
One unexpected setback, like losing your job, taking a pay cut, or watching home values drop, can leave you wondering how you’ll keep up with your mortgage. If you owe more on your home than it’s currently worth, the situation can feel even more overwhelming, especially if you’re already struggling to make payments. If you’re trying to figure out how to sell a house underwater, you still have options, even if the road ahead feels uncertain.
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Before panic sets in, it’s worth knowing that there are professionals who can help you explore your options before things get worse.
“People need to understand that they should call first and ask for help instead of beg for forgiveness later,” shares top real estate agent Billy Alt, who sells 65% more single-family homes than the average Las Vegas agent.
The sooner you reach out for help, the better your odds for financial recovery.
In this extensive guide, we’ll outline your options for taking control of a home that’s worth less than you owe, including:
- Staying in your house to build equity with a loan modification or forbearance
- Selling your home and covering the difference with cash
- Arranging a short sale with your lender
- Walking away voluntarily with a deed-in-lieu of foreclosure
- Facing foreclosure as a last resort
Start by finding out exactly where you stand
Face up to your fears and find out exactly how much you owe. Contact your mortgage servicer for details on your loan and lender.
“What most people don’t realize is that the bank you’re paying, whether it be Wells Fargo or whatever that company is, doesn’t actually own that loan necessarily. They’re just the servicer,” Alt shares. “They don’t have the final say. They have to get that approval. So it’s important to call your servicer before you miss a payment. And that’s the key: Before you miss a payment, work out that deal.”
You need to know whether a private or government lender owns your mortgage to determine what assistance programs you’re eligible for. Find your mortgage servicer’s contact details on your monthly mortgage statement or look up your mortgage directly on MERS ServicerID using your mortgage identification number, address, or personal details.
Once you know where you stand, you can evaluate your options for moving forward. Let’s walk through these options from least to most considerable loss:
Option 1: Stay in your house to build up equity
Before you throw the baby out with the bathwater, dig deep to determine if there is any way you can continue paying your mortgage with a lifestyle change or with assistance from your lender.
If you can manage it, this is your best option since it keeps you in the driver’s seat, protecting your home and credit history. While catching up on your loan may seem impossible now, with some diligence and determination, you will eventually see the light at the end of the tunnel.
There are several ways to soldier on with your mortgage:
Major lifestyle changes
If you haven’t already, step up your savings wherever possible. Dive deep into your expenses and cut out anything excess, get another job, and rent out spare bedrooms to cover your mortgage.
Repayment plan
If you’ve missed a few mortgage payments, ask your lender if a repayment plan is available. A repayment plan is a structured method for paying back a loan, typically with fixed monthly payments. These plans vary based on the type of debt. Personal loans and installment credit come with predetermined repayment terms, including fixed interest rates and monthly payments that usually stay constant during repayment.
Loan modification
A loan modification changes the terms of your existing mortgage to make your monthly payments more manageable. This might mean extending your loan term, lowering your interest rate, or, in some cases, changing both. If you’ve fallen behind, your lender may also roll your missed payments into the remaining loan balance instead of requiring you to pay everything back at once.
The goal is to help you stay in your home by making your mortgage fit your current financial situation. Keep in mind that you’ll usually need to show proof of financial hardship, and your lender must approve the modification before it takes effect.
Forbearance
With forbearance, your lender suspends or reduces your mortgage payments for an established period while you adjust financially. Depending on the lender, you pay back missed payments all at once when your mortgage resumes, gradually over time, or at the end of your mortgage.
Pros:
- You can keep your house.
- Your home may appreciate over time, reducing your debt.
- If you catch up to your mortgage, you may be able to sell later without taking a loss.
- Your credit score isn’t directly affected as long as you stick to the terms of your agreement with the lender.
Cons:
- You still need to cover ongoing homeownership costs, including property taxes, maintenance, and homeowners association (HOA) fees.
- You might owe your deferred mortgage payments in a lump sum.
- Your mortgage forbearance or modification may still appear on your credit history, even if it doesn’t directly lower your credit score.
Go this route if…
- You love your home and would do anything to keep it.
- You can catch up on your mortgage with some help.
- Your home is appreciating or holding steady in value.
Avoid this route if…
- You’ve lost your source of income and do not anticipate replacing the income anytime soon.
- You would rather sell your home and cut your losses than continue battling on.
- You’re deep in debt in other parts of your life and can no longer sustain the costs of homeownership.
Option 2: Sell your home and cover the difference with cash
You can only sell a home that’s underwater independently (without your lender’s involvement) if you have enough cash to pay the difference between the sale price and what you owe. You’ll also need to cover real estate agent commissions and closing costs.
With this option, there are two routes you can take:
Partner with a top real estate agent and find a buyer
If you have time on your side and want to sell your home the traditional way (your best shot at fetching maximum value), then work with a top real estate agent to list your home. Your agent can help with the following, guaranteeing your home sells as fast as possible:
- Make a few small improvements to help your home stand out to buyers.
- Set an attractive listing price at or slightly below market value.
- Market your home effectively to draw in buyers.
Find a top real estate agent with HomeLight’s Agent Finder. We’ll match you with the three best candidates for selling your particular home. When interviewing agents, ask about the average days on market (DOM) in your area. This will help you figure out whether selling your home makes sense based on your timeline and financial situation.
Sell your house instantly for cash with Simple Sale™
If you need to sell ASAP, then HomeLight’s Simple Sale™ is a solid option. Provide us with information on your home online, and we’ll match you with the highest bidder from our network of pre-approved cash buyers in 24 hours. If you accept the offer, you choose your moving date, typically within 60 days of closing. It’s that easy.
Pros:
- You free yourself from your mortgage and no longer have to worry about keeping up with payments.
- Your credit score won’t be directly affected as long as you continue making payments and complete the sale without defaulting.
- You can speed up your closing process by selling your home for cash, which removes financing and appraisal contingencies and can help you save on ongoing costs like taxes, maintenance, and insurance.
Cons:
- You may need to come up with extra cash to cover the difference between your sale price and what you still owe on your mortgage.
- You may have to accept a lower sale price than you would if your home had enough equity.
Go this route if…
- You can source the cash and want to cut your losses before your debt worsens.
- You’re not attached to your home enough to fight through.
Avoid this route if…
- You need to borrow money to pay the difference.
- You can catch up on your mortgage with other means of assistance.
Option 3: Arrange a short sale with your lender
In a short sale, your lender agrees to let you sell your home for less than you owe on your mortgage. To get approved, you’ll typically need to show that you’re experiencing financial difficulties by submitting a hardship letter explaining why you can no longer afford your mortgage payments.
When you list your home, you must disclose that it’s a short sale on the multiple listing service (MLS) so buyers understand what they’re getting into. Compared to the average 43-day closing period, a short sale can take months or years due to the additional parties involved and legal guidelines.
After the short sale goes through, you may or may not still owe the difference between what your home sells for and what you owe on your mortgage, depending on your state and financial situation.
Pros:
- Your lender may forgive some or all of the difference between the sale price and the outstanding mortgage.
- You avoid foreclosure.
- You can rebuild your credit faster than you can with a foreclosure.
- You may be eligible for relocation assistance.
Cons:
- Your lender may still pursue you for the remaining balance if they believe you have enough assets to cover the debt, or they may send the unpaid amount to a collection agency.
- You may owe taxes on the forgiven debt, depending on your state and current tax laws.
- Your listing may attract fewer buyers because you’ll need to disclose that the home is a short sale, which can make some buyers hesitant.
- Your short sale may take a long time to complete, with the process potentially lasting several months or even years.
- Your credit score may drop after a short sale, with the impact depending on your overall credit history and financial situation.
- Your credit report may show the short sale as a derogatory mark for up to seven years, which could make it harder to qualify for new loans during that time.
Go this route if…
- You can’t keep up with your mortgage payments and don’t expect your situation to improve soon.
- You see a short sale as your best option to avoid foreclosure.
- Your local market is seeing home values drop, making it harder to catch up on your mortgage.
Avoid this route if…
- You can catch up on your mortgage with more time.
- You can wrangle a traditional home sale.
Option 4: Walk away voluntarily with a deed-in-lieu of foreclosure
Deed-in-lieu of foreclosure is a second-to-last resort for escaping your underwater mortgage. You voluntarily relinquish ownership by handing the deed of your home to your lender in exchange for partial or total debt forgiveness.
Pros:
- You give up your home on your terms.
- You avoid the trauma of eviction from your own home (foreclosure).
- You don’t need to pay the difference between the sale price and the outstanding balance of your mortgage.
- You won’t have to participate in the home sale.
- You may be eligible for up to $7,500 in relocation assistance.
- You may have an easier time getting approved for future loans since lenders generally view a deed-in-lieu of foreclosure more favorably than a foreclosure.
- You can avoid a drawn-out and stressful foreclosure process since a deed-in-lieu is often quicker and can make the situation easier to manage.
Cons:
- You lose your house.
- Your lender may require you to try to market and sell your home first.
- Your credit score can plummet, depending on your credit standing.
- You cannot purchase another home for several years.
- You might still owe your lender cash, depending on your financial situation.
- You may owe taxes on the forgiven difference.
Go this route if…
- You can’t keep up with your mortgage payments and don’t expect your financial situation to improve anytime soon.
- You need to sell your home but don’t have enough money to cover the gap between what you owe and what your home is worth.
- You want to avoid going through foreclosure and are looking for another way to move forward.
Avoid this route if…
- You can find a way to keep making your mortgage payments.
- You may qualify for a short sale instead, which could give you another way to sell your home and settle your debt.
- You have other liens on your property, since your lender may choose foreclosure instead of taking on those additional debts.
Option 5: Face foreclosure as a last resort
If you continue missing mortgage payments and don’t take steps to address the situation, foreclosure may become your next step. During foreclosure, your lender takes back control of the property, evicts you, and sells it to recover the money you owe.
Foreclosure can have a major impact on both your finances and your peace of mind, so it’s usually considered a last resort. If you think you’re heading in this direction, reach out for help as soon as possible to understand your options and see if there’s a way to avoid it.
Pro:
- You may be able to stay in your home longer if you file for bankruptcy, since it can temporarily pause collection efforts and foreclosure proceedings. In some cases, bankruptcy may also help discharge certain debts, including some mortgage-related obligations and taxes.
Cons:
- You lose your home and will need to find another place to live.
- You may be forced to leave quickly if your lender moves forward with an eviction after foreclosure.
- You may have a harder time buying another home since foreclosure can affect your ability to qualify for a mortgage for up to seven years.
- You may still owe a deficiency balance after your home sells at auction. Some states permit lenders to pursue borrowers for this money.
- You don’t receive relocation assistance compared to a deed-in-lieu of foreclosure.
Go this route if…
- You’re underwater, cannot continue paying your mortgage for the foreseeable future, and have no other options.
Avoid this route if…
- You can find any possible way to continue making mortgage payments.
- Your lender agrees to a deed-in-lieu of foreclosure instead.
Tax implications of selling underwater
Selling a house that is underwater comes with tax consequences. For example, if you owe $300,000 on your mortgage but can only sell the house for $250,000, you have a $50,000 shortfall. If the lender forgives that $50,000, it’s considered taxable income. You must include that canceled debt on your tax return for the year it was canceled.
However, note that the Mortgage Forgiveness Debt Relief Act allows some homeowners to exclude the forgiven debt from taxable income, provided the debt was on their primary residence. For instance, if you sell the house in a short sale and qualify, you may avoid taxes on that $50,000. Talk to a tax professional who can help you understand your situation and make sure you’re following Internal Revenue Service (IRS) regulations.
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Don’t face your underwater mortgage alone
Remember, you’re not alone in your mortgage struggles.
Reach out to professionals as soon as possible to make informed decisions on how to move forward with your underwater mortgage:
- Real estate agents: Agents can help you weigh whether it makes more sense to stay or sell your home. They can also share the latest market updates and point you toward any housing assistance programs you may qualify for. Find an agent who specializes in short sales and distressed properties with HomeLight’s Agent Matching Service.
- Housing counselors: Housing counselors approved by the Department of Housing and Urban Development (HUD) offer free foreclosure prevention counseling. Call the 24/7 HOPE™ Hotline at (888) 995-4673 or find a counselor online.
- Financial advisors: If your debt goes beyond your mortgage, a financial advisor can help you sort through your options and make a plan to avoid bigger financial setbacks. They can help you adjust your budget, manage your debt, and figure out the best way to protect your home and credit.
- Foreclosure attorneys: A foreclosure attorney can work with your lender, help you understand your rights, and step in if you need to fight foreclosure in court. It’s a good idea to reach out as soon as you receive a breach letter from your lender. The earlier you get legal help, the more options you may have to prevent things from getting worse.
Frequently asked questions (FAQs) about underwater mortgage
Negative equity means you owe more on your mortgage than your home is currently worth. It’s also commonly called being “underwater” on your mortgage. This can make selling your home more complicated because the sale price may not be enough to pay off your loan.
Yes, it’s possible to sell an underwater home without your lender’s approval if you can cover the difference between your mortgage balance and the sale price. For example, if you owe $300,000 on your mortgage but sell your home for $275,000, you’ll need to pay the $25,000 gap yourself at closing. If you can’t cover that difference, you’ll likely need to work with your lender on options like a short sale.
In many cases, a short sale can be less damaging than foreclosure because it shows you worked with your lender to resolve the situation. However, it can still affect your credit and may take months to complete. The right choice depends on your financial situation and what options your lender will approve.
A short sale can take anywhere from a few months to more than a year, depending on your lender, paperwork, and the details of your situation. The approval process often takes longer because your lender has to review and accept the sale terms. Staying organized and responding quickly to requests can help keep things moving.
Yes, you may be able to rent out your underwater home, but it depends on your mortgage terms, local laws, and whether your lender allows it. Renting can help you cover some or all of your monthly payments while you wait for your home’s value to recover. Just make sure you understand the costs, responsibilities, and risks that come with becoming a landlord.
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Disclaimer: This article is meant for educational purposes only, not financial, tax, or legal advice. HomeLight encourages you to reach out to an advisor regarding your own situation.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
