Feeling stuck with a mortgage that’s higher than your home’s value? You’re not the only one. The number of homes with loans deeper than their market value—often called “seriously underwater”—has recently increased in 37 states. It’s no surprise more homeowners are now wondering, “Can I sell a house for less than I still owe?”
Whether the drop in value is caused by a changing housing market, unexpected damage, or personal financial stress, it’s important to understand your choices before making any big moves. In this article, we’ll break down what negative equity means and walk you through practical steps you can take if you’re thinking about selling a home that’s worth less than the mortgage.
What Does It Mean to Have Negative Equity?
Negative equity happens when your home is worth less than what you still owe on your mortgage. You might hear this called being “underwater” or having an “upside-down” loan. In simple terms, if you sold your house today, the money you’d make wouldn’t be enough to pay off the full mortgage, leaving you with a gap to cover.
Lenders often define a home as “seriously underwater” when the amount owed on the mortgage is at least 25% more than the current market value of the home. That means you’re deep in the red—and it’s important to know what that means for your next move.
Common Reasons Homeowners Might Sell a House for Less Than They Owe
There are several circumstances where a homeowner might find themselves needing to sell a house for less than the remaining mortgage balance. These situations often lead to negative equity, making it difficult to break even at the time of sale.
- Buying at the peak before a market downturn: When someone purchases a home during a high market period, a later drop in property values can leave them owing more than the home is currently worth.
- Uninsured damage to the property: Major damage from natural disasters, accidents, or other events—especially if not covered by insurance—can significantly reduce the value of the home, forcing the owner to sell a house at a loss.
- Neglect or major disrepair: Homes that have not been properly maintained or that require costly repairs can see a sharp decline in market value, leaving the owner in a tough financial position.
- Struggles with a second mortgage: Managing two mortgages can create financial strain. When home values fall, the combined debt may outweigh the property’s worth, prompting the need to sell a house while still underwater.
- Overvalued home at time of purchase: In cases where the initial appraisal was too high—either due to error or fraud—the buyer may have overpaid, which leads to negative equity when actual values adjust.
- Low down payment at purchase: Homes bought with minimal money down carry a high loan-to-value ratio. This puts homeowners at greater risk of negative equity if the housing market softens.
In each of these cases, the homeowner might have little choice but to sell a house for less than what is owed on the mortgage, making it crucial to understand the options available in these situations.
What to Do If You Need to Sell a House With Negative Equity
When a homeowner must sell a house but owes more than it’s worth, there are still paths forward. While none of these options are ideal, they can help limit financial damage and provide a way out of a tough situation:
- Sell the house and pay the difference in cash: If the homeowner has enough savings, they can sell the property and cover the remaining mortgage balance out of pocket. This allows them to move on without leaving any debt behind.
- Request a short sale from the lender: A short sale happens when the lender agrees to let the homeowner sell the house for less than what is owed on the mortgage. While it may hurt the seller’s credit score, the impact is usually less damaging than a foreclosure.
- Transfer the loan through an assumable mortgage: If the home loan is assumable, a buyer may take over the existing mortgage terms. This can make it easier to sell a house with a low-interest loan and avoid the complications of refinancing.
- Consider a deed-in-lieu of foreclosure: This option allows the homeowner to hand over the property deed to the lender voluntarily. Though it still affects credit, it’s often seen as a softer alternative to foreclosure.
- Foreclosure as a last resort: If no other options are available, the homeowner may be forced to let the house go through foreclosure. This is the most damaging to credit and should only be used when all other efforts to sell a house have failed.
Alternative Solutions to Keep the House Instead of Selling
If selling a house isn’t immediately necessary, there are several options homeowners can explore to keep their property while addressing negative equity:
- Wait for the market to improve: Housing markets change over time, and holding onto the property might allow the home’s value to rise, potentially putting it back above the mortgage balance. This approach requires patience, but it could eventually allow the homeowner to avoid selling at a loss.
- Make extra payments toward the mortgage: By paying down the principal balance faster, homeowners can reduce the amount they owe, which helps to regain equity sooner. Even making just two extra mortgage payments per year can have a significant impact on reducing negative equity.
- Negotiate a loan modification or forbearance: Homeowners can work with their lender to adjust the terms of their loan, possibly by extending the loan period or temporarily reducing or pausing payments. These changes can ease financial pressure and make it easier to hold onto the property. For example, a recent rule by the Housing and Urban Development Department (HUD) now allows homeowners to modify loans with a 40-year term.
- Refinance the mortgage loan: Refinancing could lower monthly payments and make it easier to manage the mortgage. Some lenders offer a high loan-to-value refinance option (HIRO), which may help those who owe more than the home is worth.
- Rent the home until the market recovers: Renting out the property can cover mortgage payments and possibly generate extra income. Homeowners may consider hiring a property management company to handle tenant interactions and upkeep, making it easier to manage the rental process.
- Increase the property’s value: Homeowners can invest in improvements or upgrades that raise the home’s market value. By increasing the property’s worth, it could eventually be worth more than the mortgage balance, providing a way to avoid selling for less than what is owed.
How to Check Your Home’s Value Before You Sell a House
When deciding whether to sell a house, one of the most important steps is determining its current market value. Homeowners should take the time to accurately assess their property’s worth. Here are some ways to check:
- Hire a professional appraiser: Bringing in a licensed appraiser can provide an objective and detailed valuation of the home, giving a clear picture of its market value.
- Compare recent sales in the neighborhood: Looking at sale prices for similar homes nearby can help homeowners gauge the value of their own property. This is especially useful for those who want to know if their home is priced competitively in the current market.
- Use online estimation tools: Homeowners can also turn to online tools to get a quick, free estimate of their home’s value. While these are less precise than a professional appraisal, they offer a good starting point.
- Consult a real estate agent: Experienced real estate agents can offer a comparative market analysis (CMA), which compares similar homes recently sold in the area. This valuable insight can help homeowners understand market trends and make informed decisions about selling their house.
Consider a Fast, All-Cash Offer to Sell a House Quickly
For homeowners looking to sell a house quickly, an all-cash offer could be the perfect solution. Here’s why considering an immediate cash offer can be so beneficial:
- Quick and Convenient Sale: All-cash offers typically close much faster than traditional home sales, allowing sellers to move on with their plans sooner.
- Guaranteed Sale: Cash buyers are far less likely to back out of a deal, reducing the risk of a sale falling through—particularly useful when there’s a tight financial deadline.
- No Financing Hassles: Since there’s no need for mortgage approval, the sale process is simpler and more efficient.
Conclusion: Explore Your Options with Confidence
Selling a house for less than what you owe on the mortgage is never an easy decision—but it doesn’t have to be the end of the road. Whether you’re facing negative equity due to market shifts, property damage, or financial strain, there are solutions available. From short sales to rental strategies and even fast, all-cash offers, understanding your options empowers you to take control of your next steps.
New England Home Buyers specializes in helping homeowners navigate challenging property situations—including those underwater on their mortgage. If you’re based in the region and need to sell fast, our team can provide a fair, no-obligation cash offer and guide you through every step of the process.
Don’t let debt or declining value hold you back. Speak with a professional, assess your property’s worth, and make a move that works for your financial future.
Disclaimer:
The information provided in this article is intended for educational purposes only and should not be considered as financial or legal advice. Readers are encouraged to consult with a qualified professional or advisor regarding their specific circumstances. The strategies and options discussed may not be suitable for every situation, and the outcomes can vary depending on individual financial conditions and local laws.
Frequently Asked Questions
Is it legal to sell a house for less than the mortgage balance?
Yes, but you’ll need lender approval, especially for a short sale.
This process typically involves providing financial documentation and proving hardship to justify the reduced sale price.
Will I still owe money after selling my house in a short sale?
Possibly. It depends on the lender’s terms and whether they agree to forgive the remaining balance.
Some lenders may pursue a deficiency judgment to recover the shortfall, so it’s essential to clarify this upfront.
How does a short sale affect my credit score?
It will lower your score, but typically not as severely as a foreclosure would.
The impact can vary depending on your overall credit profile and how the lender reports the settlement.
Can I refinance if my home is underwater?
Some programmes, like HIRO, offer refinancing options for homeowners with negative equity.
Eligibility often depends on factors such as your payment history and the type of mortgage you currently hold.
What if I just walk away from the property?
This could lead to foreclosure, which severely impacts your credit and may include legal or financial penalties.
You could also be responsible for unpaid property taxes or fees after abandoning the home.
Can I rent out my home instead of selling it?
Yes. Renting can generate income to cover mortgage payments while waiting for the market to improve.
Just be sure to check your mortgage terms and local rental laws to avoid any legal complications.
