Your options for selling your house while upside-down on the mortgage may be limited. "Upside-down" means you owe more on the mortgage than the house is worth. This generally happens after a sharp decline in property values because of a recession or real estate slump. A home purchased at an inflated price could lose much of its value during a brutal economic downturn, resulting in a mortgage that is severely upside-down.
People upside-down and needing to sell should consult with a nonprofit housing counselor certified by the U.S. Department of Housing and Urban Development (HUD). The counselors are not real estate agents but can provide free, impartial advice about your situation. This can be an important first step as you begin considering various options for selling your house while the mortgage is upside-down. For example, counselors can tell you about the financial and credit ramifications of a short sale, which allows you to sell the house for less than what is owed on the mortgage. Find a certified counselor near you by checking the HUD website (see Resources).
Timing the Sale
Your options for selling the house may be impacted by your timetable and the gap between the property's fair market value and the balance on the mortgage. You may be in a good situation if you are looking to sell the house within nine months and you owe the bank just $10,000 more than the house is worth. That scenario gives you a chance to possibly contribute the $10,000 yourself at closing after finding a qualified buyer willing to pay the fair market value. Or you may have time to find a buyer who is willing to pay $10,000 more than the fair market value. On the other hand you are in a tight spot if you are struggling to pay the mortgage and need to sell to avoid foreclosure.
Negotiating to Avoid Foreclosure
If you are in a financial bind, you should take steps to avoid foreclosure while figuring out a way to sell your house while it is upside-down. Government-certified counselors can contact your lender to negotiate temporary hardship agreements that may allow for a reduced loan payment or even no payment at all for a few months. During the same conversation, the counselor can acknowledge that you are considering options for selling the house while being upside-down. Getting the lender involved early in the process can be helpful.
"The Washington Post" reports there are a few options for completing a short sale. You can put the house up for sale, accept the best offer and use your own money to cover any short fall. Or you may negotiate a payment plan with the lender for a short fall. "The Post" reports of one homeowner who was allowed to sell his house for $30,000 less than the mortgage balance after the mortgage company agreed to a $1,000-a-month payment plan for the $30,000. In limited cases, the mortgage company may be willing to forgive the remaining outstanding balance, especially if foreclosure appears likely. "The Post" reports that it's all a matter of how much you can get a buyer to pay and then negotiating successfully with the lender.