Are you struggling with a house worth less than your mortgage? You’re not alone. When a home’s market value falls below the remaining balance of a mortgage, it is known as negative equity or an ‘underwater property.’
A first-quarter 2024 report indicated that the percentage of ‘underwater’ mortgaged homes has increased in 37 states. Therefore, some homeowners ask, “Can I sell my house for less than I owe?”
If you’re considering selling your home under these conditions in Texas, it’s important to explore your options carefully. This article will discuss why one might choose to sell a house with negative equity and provide an overview of the available strategies to manage the process effectively.
What is Negative Equity?
Home equity is the property ownership value, calculated as the difference between the home’s market value and the remaining mortgage amount. Negative equity occurs when your home’s market value is less than the amount you owe on your mortgage. Other terms for this situation are an underwater mortgage or an upside-down loan. Underwater properties have mortgages greater than their values by at least 25%. There are several reasons why your property might be in negative equity:
Incorrect Appraisal or Market Downturn After Purchasing
Your house may have been overly appraised at the time of purchase. This sometimes happens because of appraisal fraud. Thus, getting more than one appraisal from a professional before buying a property is a good idea. Also, the property value may drop after purchase due to the volatility of the real estate market.
Significant Damage to the Home
Major uninsured damages from use or natural disasters reduce your house’s value. Investing in these repairs before selling your property is always a good idea if you’re not in a hurry. After repairs, your property value may increase.
Insufficient Down Payment
A small down payment increases your LTV (loan-to-value ratio). If the market shifts, it becomes harder to avoid negative equity.
How to Sell Your House For Less Than You Owe: 4 Options to Consider
If you owe more than what your house is worth and want to sell it, there are options to consider. However, you can’t just sell it and be done. You must address the negative equity to close the deal, so it would help if you had a plan. Start gathering information so you can make an informed decision. Selling a property is permanent, and you should do a few things:
- Get your loan amount: How much do you owe? Have a look at your recent balance. You can access this information online. Do not depend on your hunch! Covering the gap with personal funds might not be a problem if the remaining balance is not high.
- Research your home’s value: Instead of using hearsay, contact real estate agents in your area and get a professional quotation for your property. These experts can pull comparable sales and give you a good estimate of your fair market value. Figure if the market is stagnant or going up. Chances are that waiting a bit might yield you a good price.
- Consider your financial position: Do you have a stable income and other assets? Your answer will guide you to the best solution available.
For selling your house in negative equity, you can choose from these four options:
1. Compensate Negative Equity Balance with Personal Funds
If the gap between your mortgage debt and your home’s market value is manageable, consider covering it out of pocket. To evaluate whether this is feasible, assess your financial assets to see which can easily convert into cash. Choose non-qualified investment accounts that you can liquidate without severe penalties.
Additionally, consider valuing personal assets like cars and jewelry for possible sale. If your credit standing is strong, another option could be a personal loan. To determine the affordability of this approach, calculate the total monthly cost by adding the potential loan payment to your expected future housing expenses. If this total exceeds what you previously struggled to pay on your mortgage, pursuing this option is not financially sensible.
2. Invest in Repairs to Increase Property Value
These improvements could be advantageous if your home’s estimated value fell due to necessary repairs. Enhancing a property’s condition can often increase its value beyond the cost of the repairs. Consult with your broker to analyze the potential financial benefits of making these improvements.
A well-maintained home attracts more potential buyers and can sell more quickly. Typically, a faster sale can result in a higher selling price. If the gap between your mortgage balance and your home’s value is manageable, making strategic repairs could effectively bridge this difference, allowing you to cover the shortfall on your own.
3. Build More Equity Before Selling
Continuing your mortgage payments can help build equity before you sell. Have your broker compare the sales data from the current month with the same period last year to determine if the value of your home is rising. Also, these properties’ Days on the Market (DOM) can help assess the market’s health. If the real estate market in your area is improving, it might be advantageous to stay in your home longer.
As you continue making regular mortgage payments, which consist of both principal and interest, you’ll reduce the negative equity in your home. Each payment decreases the remaining principal, reducing the interest due on subsequent payments. To accelerate this, consider making extra payments towards the principal whenever possible. This will directly reduce your loan balance and increase equity faster.
How can you do this?
- Consider taking a second job or working overtime.
- Rent out your property and live with family or friends.
- Host a paying guest.
- Liquidate other assets to pay more principal.
As the market values rise and your loan balance decreases, you can more effectively align your equity with your loan balance.
4. Consider a Short Sale
A short sale in real estate occurs when a lender agrees to accept less than the full balance owed on a mortgage, allowing the homeowner to sell the property for the lesser amount. Short sales are ideal when the property is underwater and the homeowner cannot pay the mortgage.
The practice became more widespread following the 2009 recession and subsequent downturn in the U.S. housing market, as many homeowners found themselves with properties valued significantly less than their mortgage balances.
The lender may forgive the outstanding balance. However, this is not guaranteed and depends on the negotiation process. For lenders, short sales are preferable against foreclosure. It allows them to mitigate losses on a non-performing loan. While the debt may be forgiven, there can still be financial and tax implications.
Get Expert Guidance
In today’s bustling real estate market, selling your home through traditional listings can be slow. A-List Properties is ready to assist if you want to sell quickly and without additional costs or fees, all with a 100% cash as-is sale that we can close in as little as two weeks!
Contact us for a cash offer before committing to an agent and a listing agreement.