How to Sell a House That’s Underwater: Navigating Your Options

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 — to 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. You can 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, eventually you will see the light of the tunnel.

There are several ways to soldier on with your mortgage:

Significant lifestyle changes:

If you haven’t already, step up your savings abilities anywhere possible. Dive deep into your expenses and cut out anything excess, get another job, and rent out spare bedrooms to subsidize 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 reduces your monthly payments, so your mortgage is more affordable for your income. Any previously missed payments are tacked on to the overall amount owed.

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.

If your financial hardship stems from the coronavirus pandemic and your loan is government-issued (Fannie Mae, Freddie Mac, USDA loans, VA loans), then you have additional forbearance protection under the CARES Act:

• You have the right to request forbearance for up to 180 days.
• You have the right to request a forbearance extension for up to another 180 days.
• No additional fees, penalties, or interest can be added to your account.
• You do not need to present documentation proving your financial hardship is related to the coronavirus pandemic.
• You are protected from some harm on your credit report.

Pros:

• You can keep your house.
• Your home may appreciate over time, reducing your debt.
• If you catch up to your mortgage, you won’t lose money on your home sale.
• Your credit score is not directly impacted (unless you apply for forbearance without protection from the CARES Act).

Cons:

• You’re still responsible for paying property taxes, maintenance, and HOA fees.
• You might owe your deferred mortgage payments in a lump sum.
• Forbearance is recorded in your credit history (unless you are protected under the CARES Act).

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: Refinance Fannie Mae’s High Loan-To-Value Refinance Option (HIRO)

When you’re underwater, traditional refinancing is not usually a viable option, since your Loan-to-Value ratio will likely exceed the maximum most lenders allow. However, if your mortgage is through Fannie Mae, you may qualify to refinance with the High Loan-To-Value Refinance Option (HIRO).

HIRO helps homeowners with little to no equity refinance to take advantage of historically low-interest rates. This can help lower your monthly mortgage payments and make payments more predictable if you switch from an adjustable-rate mortgage to a fixed-rate mortgage.

To qualify, you must meet these eligibility requirements:

• You must have an existing mortgage with Fannie Mae.
• Your mortgage must have originated on or after October 1, 2017.
• You must owe at least 97% of your home’s current value if it is your primary single-family residence, or meet these loan-to-value requirements for multi-family homes, investment properties, and second homes.

Pros:

• You keep your home.
• You can take advantage of historically low interest rates, saving significant amounts over the life of your mortgage.
• You can switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM), improving payment predictability.

Cons:

• You must meet all eligibility requirements.
• You’ll still need to put your head down and get ahead of your mortgage.

Go this route if…

• You want to keep your home.
• You meet the eligibility requirements.
• You’re confident you can catch up to your mortgage with a lower interest rate.

Avoid this route if…

• Your other debt is snowballing you into a dire situation.
• You can’t afford your mortgage even with a lower interest rate.
• You’re ineligible.

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 fees 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 light improvements to increase your home’s marketability.
• 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 what the average days on market time are for your area. This will help you gauge the practicality of selling your home in time with your financial circumstances.

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 48 hours or less. 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.
• There is no impact on your credit score.
• When you sell your home for cash, you can expedite the closing process by eliminating the financing and appraisal contingencies from the contract. This could save you weeks or even months of expenses related to the house, such as taxes, maintenance, and insurance.

Cons:

• Mustering up enough cash for the transaction is a feat if you’re already struggling to pay your mortgage.
• You’ll likely take a discount on the price.

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 4: 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. You must provide your lender with a letter of hardship outlining the details of your financial difficulties.

When you list your home, you must disclose that your listing is a short sale on the MLS, so buyers understand what they’re getting into — a sale that’s anything but short. Compared to the average 50-day closing period, a short sale can take anywhere between months to years to close due to the additional parties involved and legal guidelines.

After an arduous closing, you may or may not be on the hook for the difference between the sale price and your mortgage (the deficiency), depending on your state laws 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:

• If your lender believes you have sufficient assets to pay your debt, they may continue pursuing you to pay the deficiency or pass the torch to a collection agency to follow through.
• Depending on your state, you may owe taxes on the difference that your lender forgives.
• You must disclose that your listing is a short sale on the MLS, which turns off some buyers.
• Short sales take months to years to close.
• Your credit can dip as much as 160 points, depending on your credit history.
• A short sale remains on your credit report as a derogatory item for up to seven years.

Go this route if…

• You cannot continue paying your mortgage for the foreseeable future.
• A short sale is your only option to prevent foreclosure.
• Home values are depreciating in your market, pushing you further behind on your mortgage.

Avoid this route if…

• You can catch up on your mortgage with more time.
• You can wrangle a traditional home sale.

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 own terms.
• You avoid the trauma of eviction from your own home (foreclosure).
• You do not need to pay the difference between the sale price and the outstanding balance of your mortgage.
• You do not participate in your home sale.
• You may be eligible for up to $3,000 in relocation assistance.
• In a credit review, a deed-in-lieu of foreclosure is viewed more leniently than foreclosure.
• A deed-in-lieu of foreclosure is often faster and less emotionally taxing than a foreclosure.

Cons:

• You lose your house.
• Your lender may require you to attempt to market and sell your home first.
• Your credit score plummets on average 50 to 125 points, 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’re underwater and cannot continue paying your mortgage for the foreseeable future.
• You need to sell your home but require the funds to participate in a sale.
• You want to avoid forcible foreclosure.

Avoid this route if…

• You can find any way to continue making mortgage payments.
• You can convince your lender to agree to a short sale instead.
• You have other liens against your property — your lender may force foreclosure instead to absolve rather than inherit this debt.

Option 6: Face foreclosure as a last resort

You will inevitably face foreclosure if you continue to default on your mortgage payments without acting on any of the above options. With foreclosure, your lender takes control of a property, evicts you from your home, and sells the property, usually at a foreclosure auction. To alleviate COVID-19 hardships, the CARES act specifies that lenders may not begin foreclosure against you until June 30, 2020.

Foreclosure is the most detrimental scenario, inflicting severe damage on your financial history and psychological health. If you’re heading towards foreclosure, seek professional assistance immediately to assess possible alternatives.

Pros:

• If you declare bankruptcy first, you may stay in your home longer, freezing all debt collection against you. Bankruptcy might also excuse you from paying your remaining mortgage and related taxes.

Cons:

• You lose your house.
• A lender can forcibly evict you with minimal notice.
• You’re ineligible to purchase another home for up to seven years.
• You still may owe a deficiency balance after your home sells at auction; Most states permit lenders to pursue borrowers for this money.
• You do not 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.

Don’t face your underwater mortgage alone. Help is out there

Remember, you’re not alone in your mortgage struggles, especially in these unprecedented times.

“Last month, I went through all my past clients that I knew that owned a home. I asked them how they’re doing and did a mini survey on if they were out of work. About 25% of my clients have no jobs in the household and 50% are on unemployment,” shares Alt, whose market in Las Vegas faces one of the nation’s most drastic unemployment hikes due to COVID-19.

“There were a lot of people that needed our help.”

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