Can you sell your house for less than you owe on it? Should you even do this?
It depends.
The housing market can be a very finicky thing.
Housing prices are constantly fluctuating. As someone interested in a real estate transaction, you'll always hear things like "It's a seller's market!" or "It's definitely a buyer's market right now!" sometimes at the exact same time.
Because of the constantly changing nature of real estate sales, there's a bit of an unfortunate situation you can find yourself in: owing more on your house than it's worth in the current market.
This is called negative equity.
Wondering how to handle dealing with negative equity? Keep reading.
Can You Sell Your House for Less Than You Owe?
What are you supposed to do when you buy a property when prices are at their peak and then the market takes a sudden downturn? Or when there is significant damage to your home? Are there any good options?
There are typically three ways to attack this problem, but it's important to keep in mind the answer to the most common question in this situation:
If you have to sell a property that is worth less than the amount you owe on the mortgage for it, will you still have to pay off the full mortgage amount?
Unfortunately, the answer is yes.
But here are your options for negative equity:
Rent it Out
Sometimes, when people are wondering if you can sell your house for less than you owe, they choose to rent out their home as a way to try and catch up on mortgage payments and regain positive equity on their home.
Especially if you really need to move (for a job opportunity across the country, for example) renting out your home can be an attractive option. This is because it does not affect your credit to simply become the landlord of a property, rather than a resident.
The downside is that you are still responsible for the maintenance costs and repairs on the property. Also, if you are living far away, you might need to hire someone to manage the tenants and their needs – only adding to the growing costs of the home.
Wait it Out
When you are in negative equity, it's really important to assess whether or not you actually need to sell your house right away.
It can be easy to panic and want to escape something that you might see as a "bad investment." But it's possible that by waiting a little bit, you can ride out the downturn in the market and eventually sell your home for, if not what you owe, a whole lot closer to it.
It's also important to compare the monthly mortgage payment that you make, especially if you choose to refinance your home, plus the associated costs of repairs, taxes, and homeowner dues to the cost of renting in your local area.
If, after working with a financial professional, the cost of renting in your area (even with the added cost of paying back the difference in your mortgage to the bank) is still less, then it's time to consider a sale.
Sell out with a Short Sale
If you owe more than your house is worth, and really, really need to sell it, a short sale is your best option.
In a short sale, the bank will allow you to sell the home, even though it's worth less than you owe. For example, let's say you purchased a home for $400,000 and have paid $90,000 in equity, including the down payment.
The home is now currently worth $285,000 meaning you have $25,000 is negative equity.
If the home sells for the asking price of $285,000 during a short sale, the bank will immediately reduce your debt by that much. Being on the hook for $25,000 is a lot better than owing the bank $310,000.
The hope with a short sale is that the bank will allow it to proceed even though you owe more than you'll make it from it, especially if you are having a hard time keeping up with payments anyway.
This is because it saves the team at the bank from the possibility of a long and expensive foreclosure suit and then being stuck with the responsibility of trying to sell a foreclosed home.
Final Thoughts
It's always better to partner with a trusted financial advisor when trying to decide if you can sell your house for less than you owe. Each situation is so unique, so it's best to talk with someone who knows your finances and can advise you on whether to rent it out, wait it out, or sell out.
Looking for someone to guide you through this stressful process? With great agents and a flat rate, listing with Clever is a no-brainer! Call us today at 1-833-2-CLEVER or fill out our online form to get started.
