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How to Sell Your Home if You Owe More Than It Is Worth

Over the last three to five years, real estate values have plummeted to the point that homeowners owe more on their mortgage than the property’s market value. When a home value declines below the mortgage, it is considered an “upside down” or negative equity mortgage. What should you do if you need to sell your “upside down” home?

First, how do homes get into an upside down equity position? For many years now, lenders have been financing loans up to or near 100% of the value of the home. That means if you buy a home with no money down and get a loan for the full purchase price, you have leveraged 100% of the price of the home. Lenders are able to do this with the assumption that real estate values will continue to rise, giving sizable equity to the owner in just a few years.

FHA loans with government guarantees on defaulted loans give lenders another reason to offer 100% financing with no money down. Additionally, if a homeowner had equity in their home and took out a second mortgage, they could be fully leveraged in loans as well.

The problem with leveraging 100% of your home is that if real estate values decline, as it has in many areas over the last few years, your home’s selling value may be below what you actually owe on your mortgage.

What are your options if you want or need to sell your home?

Short Sale

If you are behind in your mortgage payments and are facing the possibility of foreclosure, ask your mortgage lender to agree to a “short sale.” This means that you can sell your home at the lower market value, pay the lender whatever proceeds you receive from the sale, and the lender will write off the balance of the loan. Though you would come away with nothing in your pocket for equity and you lose your home, you still avoid having to go through foreclosure – and you save your credit score.

Wait To Sell

If you are able to wait to sell your home, you most likely will see your home’s value rise again in the long term. Historically, real estate values have continually risen at an average of 3% to 5% per year. Though there are times when values temporarily plummet, they eventually rise again. It may take a few years, but if you can continue making your mortgage payments, you may find this is the best option.

Refinance at Lower Interest Rate

As the economic crisis continues to affect millions of Americans, the Federal Reserve continues to drop interest rates to help stimulate loans and financial transactions. If possible, refinance at a much lower rate than your current so you can save possibly hundreds on your monthly mortgage payment. If you are facing foreclosure, this could be a good option to avoid foreclosure and keep your home.

If you absolutely must sell a home in an upside down situation, talk to your lender. Most lenders are willing to work with their borrowers to find a solution that saves both them and you from foreclosure.

This article is intended for general information. Always seek sound financial and legal advice before making any financial decision.