That horrifying moment that you find your mortgage balance is higher than what your house could potentially be sold for. This can occur after a dip in the market, a cash-out refinance, having a low down payment when you purchased, or simply time and interest working against you. Whatever the reason, the immediate follow-up question is one of practicality; who is even able to sell a house like this and how?
The simple answer is that yes you can sell a house you owe more than it is worth, but doing so does not look like a typical sale. This guide takes you through what being underwater on a mortgage entails, the realistic avenues open to you, and where a cash sale comes into play when pay-off isn’t full of equity as it is.
The information provided in this article are for general informational purposes only and is not legal, tax, or financial advice. No two mortgages, lenders, or financial situations are the same so it is always best to talk with your loan servicer, a HUD-approved housing counselor or something licensed professional about your unique circumstances.
What Does Owing More than Your House is Worth Mean?
This predicament is frequently referred to as being “underwater,” or having negative equity: Your mortgage balance is considerably more than your home is worth on the open market. You are $30,000 underwater if your home is worth $220,000 today and you still have a mortgage of $250,000.
It’s not exactly an isolated incident. It means that you typically have some mix of:
- A drop in local home values since you bought or last refinanced
- A small equity buffer at the beginning, with a low down payment at purchase
- A large cash-out fix to gain over the desired mortgage balance without generating more worth of the residence
- Early payments on loans that are interest-heavy, where you are paying the vast majority of your payment in interest and not principal
- Further softening of local markets, including in previously strong price growing regions
Just because you are under water does not mean you have done anything wrong. It also does not mean that you are stuck. A typical sale, however, in which the proceeds just pay off the mortgage and the rest goes to you won’t fly without putting money on the table. That’s what changes your options.
Your Options When You’re Underwater
Stay and Await for Equity Return
If there is no financial pressure to move, then wait reasonably. Home values and mortgage balances do not move in sync, so if the circumstances are right it is possible for borrowers to close this gap by making payments (which reduces principal), allowing more time pass, and home value recovering on its own. This only works if you can afford to not move out in the near term and continue making payments with relative ease.
Refinance
Most lenders require a certain minimum amount of equity to approve a new loan so refinancing an underwater mortgage will be a difficult, if not impossible task. While they have existed in the past, availability is limited and not guaranteed, some government-backed refinance programs for underwater borrowers do exist. The best way to be sure is to ask your current loan servicer directly.
Option 4: Pay the Difference in Cash
As long as you have sufficient savings available to close, you can just sell the traditional way and make up the difference between your sale proceeds and your mortgage payoff at closing. This is the easiest way of all if you can afford it, as there is no negotiating with your lender whatsoever, but this takes cash on hand in addition to standard selling expenses such as agent fees and closing costs.
Request a Short Sale
The term short sale is used when your lender agrees to take less than the full mortgage balance in order to release lien and let the sale go through. The Consumer Financial Protection Bureau offers this definition of a short sale: A sale of your home for less than what is owed on the mortgage, if your lender agrees to allow you to do so. This isn’t automatic. You are only likely to be approved for a short sale if you can prove financial hardship, and it’s up to your lender as to whether they think it makes better economic sense for them to approve the sale rather than going through with foreclosure. If you want to learn more about the process and the parties involved, our guide on what is a short sale and how it works covers that in detail.
Sell As-Is to a Cash Buyer
Selling for cash does not cancel out the difference between what you owe on the property and its actual value, that mortgage will still need to be dealt with, unless through lender-approved short sale. What it does change is everything around that transaction: no agent commissions cutting into the selling price, no repair costs to front before you list and no waiting on a buyer’s financing to close. The same goes to sellers who is underwater, as well as an investors (deal with property that needs fixing), written off those fee can create a big gap between sales price and payoff amount.
How a Short Sale Really Works
The mechanics behind a short sale (which come up frequently for underwater homeowners) are worth getting familiar.
- You document financial hardship. Lenders want to know that you have simply reached the point where you can no longer continue making payments as agreed, and not just that the home is worth less than what you owe.
- The lender orders a valuation. Before agreeing to anything, they usually will ask for an appraisal or broker price opinion of the current market value of their home.
- The buyer submits an offer to the lender for approval. A short sale simply means the lender has to approve the specific offer, not just the concept of a short sale.
- We go to the lender choose: approve, counter & deny. Even a creditworthy borrower with a proven hardship can’t count on approval.
- If the lender agrees to the short sale, closing proceeds and they release their lien because they have received a lesser amount as payoff.
Different lenders and moratorium contracts define it in different ways, so this is a negotiation that can take some weeks to months, rather than something with guaranteed results. That timeline and uncertainty is the one chief downside from going through a direct cash sale, which do not depend on lender approval for the transaction itself (though the mortgage balance does have to get worked out).
Underwater Sale Paths Compared
| Factor | Traditional Sale (Pay Difference) | Short Sale | Cash Sale (As-Is) |
| Requires lender approval | No | Yes | No, for the sale itself; mortgage payoff still counts |
| Out-of-pocket cash needed | Yes, to cover the shortfall | Generally no | Depends on the payoff gap |
| Repairs typically required | Yes, for most buyers | Sometimes, negotiable | No |
| Agent commissions | Yes, typically 5-6% | Often yes, if using an agent | None on a direct cash sale |
| Timeline | Weeks to months | Weeks to several months (lender-dependent) | Days to a few weeks |
| Credit impact | None, if paid in full | This might be referred to as settled for less | Depends on how the mortgage is handled |
Underwater Cash Sale
Eagle Cash Buyers buys your home as-is, no matter the level of equity in the property. Here’s what’s actually involved:
A written, no-obligation cash offer. You learn what the property is worth as is before you put money down on anything.
No repairs or agent commissions. If you aren’t listing the traditional way, there is no 5-6% commission and nothing that needs to be fixed prior to the offer being written.
The closing process takes care of the payoff mortgage. Liens, including your existing mortgage, are part of the transaction which is resolved through the title company and not an issue you typically need to solve before closing.
We’ve been through situations of negative equity before. It’s not off the table, but if what’s owed is more than what the property can sell for then it’s more complicated, often will require siome involvement of lenders. The general process is detailed on our how it works page, and what an as-is sale includes more broadly can be found on our sell my house page.
If you are also behind on payments, in addition to being underwater, the timeline is even more important. If you were wondering how a pending foreclosure shifts the calculus, take a look at our guide on selling your house during foreclosure; for what is specifically happening in that situation, check out our foreclosure page to see what a fast cash sale can do.
Surprising Credit & Tax Facts You Should Know
Every underwater seller gets surprised by two things, and both are worth being familiar with before you choose a future course.
Credit impact depends on how the shortfall is addressed. Experian says a short sale is usually less damaging, particularly if you firmed up the deal without any missed payments beforehand, than a foreclosure only if it goes to the credit bureaus as a settled account, but that can vary by your credit history and how the lender reports it. Also, this is different than just selling and bringing the difference to closing, which generally has no negative credit impact as long as the mortgage gets paid in full.
Mortgage debt forgiven can be taxable. The IRS can treat the amount of your debt that a lender forgives during a short sale as taxable income (nonprofit groups interested in saving your home may choose to contact them through our partner site; again, if any portion of the money you owe is forgiven, it can be considered income by the IRS except under certain circumstances and exceptions, insolvency or rules pertaining to a qualified principal residence). This is not really a piece of general guidance, first and foremost because the details really depend on your individual loan history and personal finance.
An approved housing counselor from HUD can review your figures for little or even no charge and help you come to a decision about which avenue may be right when the time comes before you lock down one.
Frequently Asked Questions
Do You Sell a House if You Owe More Than It Is Worth?
Yes. There are a couple of options here: paying the difference in cash at closing, arranging with the lender for an approved short sale and in some cases selling as-is to a cash buyer while negotiating how it’ll all work with what you owe. What’s right for you depends on how much cash you have on hand, how long you’ve got to wait and whether you’d qualify as financially distressed enough to settle the mortgage balance for less than owed as part of a short sale.
Now I’d Like to Know, Is It Necessary to Get Permission From Your Lender in Order to Sell a House That Has No Equity?
Only if you are selling for “less” than the total of our mortgage payoff and hoping that the short sale will accept this reduced amount. If you are covering the gap out-of-pocket, no special approval is needed other than a typical payoff statement.
If I Short Sell My Underwater House, Will It Impact My Credit?
Well, that depends on how it is resolved. If you pay off the mortgage in full including bringing cash to the closing table, generally this is a neutral credit impact. A short sale reported as a settled account usually hurts your credit less than a foreclosure, but it is still not neutral, especially if payments were missed prior to the completion of the short sale.
Is Forgiven Mortgage Debt Taxable?
It can be. These canceled or forgiven debt are usually considered taxable income by the IRS, but certain exclusions may apply depending on your situation. And it will depend very much on individual circumstances is why this is worth having a review with your tax professional to get advice.
Can I Sell My House Fast for Cash When I Am Underwater and Behind on Payments?
This situation has more variables because there is the payment history and the negative equity which affect how long you have to wait and what programs/options you qualify for, however its not an automatic disqualifier. Get in touch sooner rather than later will almost always leave more open doors.
What Is the Difference Between a Short Sale and Selling It for Less Than What I Owe?
They’re related but not identical. Strictly speaking a short sale is when your lender agrees in writing to accept less than the full mortgage balance due as satisfaction of their lien. If you can come up with the difference yourself at closing, you are not short selling and simply paying off the loan in full using outside funds.
The Bottom Line
It restricts your options, but it does not eliminate them, owing more than your home is worth. Whether waiting it out, bridging the gap yourself, trying for a lender-approved short sale or selling as-is for cash is right comes down to how quickly you have to act, your current financials and how much uncertainty you’re willing to sit with. Now, if your home is worth $80,000 and you owe $200,000 on the mortgage, it will not make that underlying balance go away by itself, but what a cash sale takes out of the equation are those repair costs an agent would charge to close the gap between what your home is worth and what you owe on it.
If you’re under water, trying to see what your realistic options really are, then contact us. We purchase homes in its current condition across 44 states and can detail how much of a cash offer your unique situation, such as an outstanding mortgage balance will affect a cash offer. Head over to our sell my house page and let me show you how it works.r situation.
