Selling a Home When Owing More Than It's Worth

by Beverly Bird, Demand Media

    If you owe more on your home than its appraised value, it's said to be "underwater." You may think that your only option is to sit tight and wait out the market before you sell. However, the market may not rebound, or at least it might not do so for a significant period of time. If you're running out of patience, or if some other factor requires that you sell right away, you have some options.

    Consider a Contract for Deed

    You can expand your pool of potential buyers by making the purchase easier for them. You may get a purchase price equal to your mortgage balance if you accept a contract for deed as opposed to requiring a conventional mortgage. Accepting a contract for deed means you're financing the sale yourself. The buyer doesn't have to worry about things like high closing costs or mortgage origination fees, so this might make your home a more attractive option than others on the market. You probably won't receive a down payment from the buyer, but the buyer will make a monthly mortgage payment to you so you can cover most, if not all, of the payment you owe your lender. You may need permission from your lender if you elect this option, but if your lender agrees, you keep legal ownership of your property until the buyer pays off your contract. If the buyer doesn't pay you, you can reclaim your home from him without going through foreclosure proceedings, and you usually get to keep any payments he's made thus far.

    Loan Modifications

    Another possibility is to convince your lender to modify your mortgage. You might be able to decrease the principal balance through modification, as well as your interest rate. Depending on how much your current mortgage exceeds the appraised value of your home, your home might not be underwater anymore after a modification, or it may be only minimally underwater. If your shortfall is not significant, and you then sell the home, you can make a cash payment to your lender for the difference and your mortgage will be satisfied.

    Short Sales

    A short sale is a less savory option, because it will ding your credit score by anywhere from 50 to 100 points. If you have no other options, however, it might be worth looking into. In a short sale, your lender will agree to accept the appraised value of your home from a buyer and write off the difference between its value and your mortgage balance. Most lenders won't agree to a short sale just because you want to move, however. You'd typically have to prove some sort of financial hardship that prevents you from making the mortgage payments.

    The Rental Option

    You can also postpone the sale of your home by leasing it for a year or two. It's possible that by the end of the lease term, your home might rise in value. Ideally, you can rent the property for something close to your monthly mortgage obligation. If you can rent it for more than your mortgage payment, it's even possible that a new lender will acknowledge that extra rental money as income, so you might be able to qualify for a new mortgage.

    About the Author

    Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.