Selling Your House at a Loss: Consider These Options When Your Home Turns into a Financial Burden

Many people consider home ownership a safe long-term investment. After all, overall home values have trended upwards in every decade from 1940 to 2000, according to the U.S. Census. But despite rising home values, owning real estate (like most investments) doesn’t guarantee a profitable return. So it can be particularly painful to find yourself in a situation when one of your only options includes selling your biggest asset at a loss.

Maybe you got caught up in a bidding war, bought at a market peak, and buyer interest (along with home values) has since cooled. Or you’ve experienced a sudden and extreme change to your financial situation, such as a layoff or death in the family. Whatever the circumstance, you should act early if you’re suddenly struggling to make your monthly mortgage payment. Selling at a loss is one option — but there are other avenues you can explore before taking that step.

For insight about selling a home during a turbulent financial time, we spoke with real estate pro Kim Batterman, a single family home expert based in the Fox Cities area of Wisconsin. Batterman works with 74% more single family homes than the average agent in the area.

We also connected with HomeLight Home Loans Mortgage Sales Leader Richie Helali, who offered an insider’s look at mortgage options that could help you hold on to your home — or let it go without falling into foreclosure.

Should you sell your house at a loss?

When to consider selling at a loss

If thoughts of your mortgage payment (combined with upkeep costs) keep you up at night, it may be time to sell. These are some reasons that selling at a loss could make sense — and free you from a financial bind that’s been weighing on you.

You fall behind on your mortgage payments and can’t seem to catch up

Perhaps you underestimated how much it costs to own and maintain a home. Or your company eliminated your long-time position and you’re going back to school. Maybe you’re facing catastrophic medical bills. You run the risk of a foreclosure if you miss too many payments. Selling, even at a loss, could be the better alternative.

You owe significantly more than your home is worth — and you’re struggling financially

Maybe the real estate market took a dive and you went overboard on past home renovations. You’re maxed out on second loans and now you owe more than your home’s value. Whatever the reason, you’re struggling to keep up with house payments, and you don’t see things changing anytime soon.

You have to relocate for work

When it comes to your career, your employer has the power to mandate where you live. This holds particularly true for members of the military, when a sudden order moves you to the other side of the country, or another part of the world.

You don’t want to become a landlord

Renting out your home could alleviate some financial burden. But becoming a landlord isn’t for everyone. As the owner, you’re still responsible for the cost for maintenance, managing tenants to ensure timely payments, and the legal liability of renting to others.

You’re going through a divorce

Splitting assets to comply with a divorce decree may result in the immediate sale of the shared home, even if real estate market conditions aren’t the best.

There’s been a death in the family

After enduring a heart-wrenching loss, your financial situation may change dramatically to the point where selling becomes your only option.

When to think twice

If you have the financial resources to stay afloat, it could be better to wait until the market swings to your favor rather than lose some or all of your equity by selling at a loss. Here’s when you may want to reconsider — or at least carefully weigh the consequences of — a home sale.

Your home value dropped, but you can still manage the mortgage payments

You may feel lousy after buying at a market peak, right before home values plummet. But if you can still manage the payments and upkeep, it may be beneficial in the long run to hold on to your home if your original plan was to live in the house for the long term. Since overall home values have increased since 1940, you could recover some or all of your home value when the market recovers.

Homeownership isn’t what you expected

Perhaps you rushed into buying, and homeownership feels more like a burden than an achievement. Now you want to free yourself from a large monthly mortgage payment and the cost of maintaining a home. After all, moving abroad and working remotely sounds more appealing than cleaning gutters and raking leaves.

Before you jump into a nomadic lifestyle and take a loss on your home, evaluate how much you stand to lose, along with the long-term financial ramifications, if you sell at a market low. How long will it take you to recover from the loss? Would it be better to hold off for now and wait until the market cycles back in your favor? If you can stand to wait, you could pursue a lifestyle change without the financial setback of losing money on your home.

You want to buy a different house

You just stumbled upon your once-in-a-lifetime dream house and need to sell your current home quickly, even if it means losing some of your equity. If you’re getting a great deal on the new house and think the home will appreciate in the long run, selling could be a smart risk. But if you lose money on your current home while piling on additional financial stress with a higher house payment, you may want to reevaluate selling.

Alternative solutions to selling at a loss

If you’re in a temporary financial bind and struggling to pay the mortgage, hanging a for sale sign on your lawn isn’t the only option. Consider these alternative options if you’re determined to keep your home instead of selling it for less than you purchased it.

And if you’re feeling the pinch financially, look into those options sooner than later. “Start that process immediately,” encourages Helali. “If … they’re in a situation where [making the mortgage payment] is going to be a problem, even if they haven’t missed any payments yet … reach out to the loan servicer and see what options may be available.”

Hold on until home values recover

Before you rush to sell when market values are low, think about whether you can hold on — at least until prices start trending upward. Look into temporary income-boosting solutions such as renting out a spare bedroom on Airbnb, applying for a second job, or launching a side hustle.

Refinance your existing mortgage loan

Determine whether a refinance loan could lower your monthly payment to allow for extra breathing room in your monthly budget. If you qualify and your home appraises at the necessary value, a lower interest rate or longer loan term (30 years instead of 20, for example) could drop your monthly payment to an affordable amount.

A refinance loan comes at a cost, though. Closing costs generally run 1% to 1.5% of the loan amount, although no closing cost options exist (that is, they’ll be lumped in with your principal or you’ll pay a higher rate).

If you’re feeling the heat financially, Helali stresses that you shouldn’t wait if you think refinancing is the best option. “More options may be available to you if you haven’t been late on your mortgage,” he says. Lenders generally won’t approve a refinance loan if you’re already behind on your mortgage payments.

Negotiate a loan modification

Refinancing isn’t an option for everyone, especially if your home’s value has dropped and you no longer have enough equity or income to qualify. Another option you can explore includes a loan modification, or a negotiated agreement with the lender to change your loan terms.

A modification could reduce your monthly payment by granting additional years to pay off the balance, lowering your interest rate, or reducing your loan balance. Not all lenders may offer a loan modification option, so contact your mortgage provider directly if you’re considering this solution.

Ask for a loan forbearance

If you’re in a temporary financial slump and just need a few months to recover, you may be able to work out a forbearance agreement with your lender. Your lender agrees to let you skip or reduce your monthly payment for a set period of time. This option gained national attention among homeowners during the 2020 pandemic, when the federal government implemented the CARES Act for economic relief.

Forbearance doesn’t forgive your debt, though. You’re still on the hook for the mortgage, and your lender simply grants a temporary reprieve for payments.

Short sale: selling when you owe more than your home is worth

You may reach a point when alternative solutions to keep your home don’t resolve your financial concerns. In certain cases, selling your home remains the most logical choice. But there’s one caveat to selling: if your mortgage balance exceeds your home’s value, you could end up paying the difference out of pocket when you sell. That is, unless your lender agrees to a short sale with a deficiency waiver.

In a short sale situation, the mortgage lender allows you to sell your home for less than the remaining loan balance. Laws in some states hold the homeowner responsible for the difference between the loan balance and purchase price, unless the lender waives the right to collect by issuing a deficiency waiver. Most states allow lenders to pursue a judgment against the borrower after a short sale. Laws in a few states, such as California and Nevada, prohibit deficiency judgments in some circumstances.

One benefit of a short sale: it doesn’t impact your credit as much as a foreclosure or bankruptcy, say Helali and Batterman. Instead of waiting seven years before you’re able to qualify for a conventional loan with a foreclosure on your credit record, you may qualify for a new mortgage two-to-four years after a short sale, Helali explains.

Short sales have their drawbacks, though. You’ll need to prove, through documentation, substantial hardship to the lender. “The banks are gonna send you documentation that asks what assets you have and you’ve got to explain, identify, and then prove what assets you have or don’t have.” It’s a complicated and time consuming process, warns Batterman.

Deed in lieu of foreclosure: your final option before foreclosure

A deed in lieu of foreclosure retains similarities to a short sale. But instead of selling your home to a third party buyer, you transfer ownership to your lender to avoid a forced foreclosure. Similar to a short sale, you may need to request a deficiency waiver in writing from your lender to cancel any outstanding debt liability.

Tax implications: Is your loss deductible?

After taking a loss on the sale of your home, can you at least deduct the amount on your income tax return? Unfortunately, in most cases, probably not.

According to IRS rules, you can’t claim a capital loss against personal property, including a primary residence, on your tax return. (Loss to business property is a different story.)

And converting your home to an investment property probably won’t benefit you. That’s often because the IRS values the home based on the date you convert your home for business or investment use, not the date of the original purchase. For illustration, take a look at the following scenarios.

Scenario 1: Morgan buys a home for $350,000. Due to financial hardship, she sells her home during a real estate market dip two years later for $320,000. Because her home was also her primary residence, Morgan doesn’t qualify for a capital loss tax deduction.

Scenario 2: Alex purchases a home as a primary residence for $400,000. She converts it to a rental property two years later during a real estate downturn, when the fair market value of the home dips to $325,000. After one year as a landlord, Alex sells the home for $322,000.

In this situation, Alex would likely be able to deduct a capital loss on the rental property, but it would come with some caveats. First, Alex would need to calculate the loss based on the home’s fair market value when she turned the home into an investment property, or $325,000. Per IRS tax code, she can generally deduct up to $3,000 of capital loss per tax year (and carry over additional losses to future tax years). In this situation, Alex can deduct a $3,000 capital loss from her income tax return, not the $78,000 loss from the home’s original purchase price when the home was her primary residence.

It’s always best to consult a tax professional to see what options (and deductions) may be available to you in your given circumstances.

The IRS may tax forgiven debt as income — with some exceptions

In general, the IRS considers a debt amount that the lender forgives as taxable income. That’s because the borrower essentially gains back the amount they would otherwise have been obligated to pay. Loan forgiveness may include a short sale, foreclosure, deed in lieu of foreclosure, and loan modification.

Exclusions apply in certain circumstances if the lender cancels a debt on your primary residence. The IRS Interactive Tax Assistant can help you determine whether you’re required to include the canceled debt on your federal income tax return.

Of course, the tax scenarios and examples in this blog post are meant to be illustrative and educational, and should not be considered legal or tax advice. If you need help determining the taxes on your home sale, it’s important to consult a skilled tax professional.

Tools and resources to help you sell and move on

We assembled a list of online tools and resources to help you navigate your available options, from whether you should sell or follow an alternate route.

Online home value estimate

HomeLight’s Home Value Estimator offers a quick, easy jumping off point for determining your home’s value estimate based on current market trends.

Your trusted mortgage advisor

If you’re just starting to struggle and you haven’t yet missed a payment, look into available refinance options to find out if there’s a way to lower your monthly payment.

Your lender or loan servicer

Contact your mortgage lender or servicer to ask about what options are available to you if you can no longer make your mortgage payment or if you’ve already missed a few payments. Each lender manages their own processes, requirements, and timelines for loss mitigation avenues such as forbearance and loan modification, says Helali.

And don’t be afraid to ask about specific options. “It’s kind of [the mortgage servicers’] job to provide these options to folks when they say that they’re having a little trouble,” says Helali. But “it’s always good to ask specifically for these [options] by name,” he adds.

Distressed sales real estate agent

A seasoned agent with experience can provide you with an individualized market analysis and advise you on options for selling. If your loan amount exceeds your home’s value, it’s important to work with an agent who has short sale experience because of the complicated documentation requirements, says Betterman. “Each [bank’s short sale] portal is different. Every bank has a different portal, so you have to have some IT expertise,” she adds. “You also have to have some additional legal information, and many times people will hire an attorney to help them.”

Instant cash offer

If you’re looking to sell as quickly as possible, you can also request an instant offer from a cash buyer. With a cash buyer program such as HomeLight’s Simple Sale, you could sell your home in as little as 10 days without agent fees or listing costs.

Just remember: selling at a loss isn’t your only option

While no one wants to find themselves in a financial bind, preventing foreclosure and selling at a loss could end up being the best choice for your situation. But before you choose to sell, explore all of the options that could help you keep your home, from refinancing your existing loan to negotiating a loan modification.

In the end, losing money on a home sale isn’t the ideal outcome. But it could free you from a stressful situation, allowing you to move on to a new phase of your financial journey.

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