Underwater Houses: Can You Sell When You Are Behind on Your Mortgage?

Imagine standing on the precipice of a vast, uncharted ocean, the weight of an entire house pressing down upon your shoulders. This isn’t the beginning of a nautical adventure, but rather the experience of countless homeowners trapped in a predicament known as “underwater houses.”

Homeownership, a quintessential part of the American dream, can quickly turn into a financial quagmire when mortgage payments begin to pile up. For many, the journey of owning a home takes an unexpected turn as life’s twists and turns lead to missed payments, financial setbacks, and, ultimately, the frightening prospect of foreclosure.

The financial challenges that come with falling behind on your mortgage can be overwhelming, affecting not just your home but your entire financial future.

If this all sounds familiar to you, then you’re reading the right article. We’re going to take a detailed look at the often perilous world of homeowners who find themselves underwater and facing the daunting question: Can you sell when you are behind on your mortgage?

What are Underwater Houses?

Owning a home is often considered a cornerstone of financial stability and a symbol of success. However, when the tide of economic circumstances shifts, even homeowners can find themselves sinking into uncharted waters.

It’s in these depths that the concept of an “underwater mortgage” emerges, leaving many to wonder how they ended up in such a precarious position.

Defining the Underwater Mortgage

An underwater mortgage, in simple terms, occurs when a homeowner owes more on their mortgage loan than the current market value of their home. Picture this scenario: You bought your dream home for $250,000 a few years ago, but due to various economic factors, the value of your property has dropped to $200,000.

If you still owe $220,000 on your mortgage, you’re submerged in an underwater mortgage by $20,000. It’s like being caught in a financial riptide.

The Descent into Underwater Territory

Understanding how homeowners end up underwater requires a closer look at the sequence of events that can lead to this precarious situation. It often begins with an optimistic step: buying a home.

As the housing market fluctuates, a variety of factors can contribute to homeowners finding themselves underwater.

Market Fluctuations

The most common factor is the unpredictable nature of the real estate market. Housing prices can soar to remarkable heights during a housing boom, enticing buyers to invest.

However, when the market takes a downturn, property values can plummet, leaving homeowners owing more than their homes are worth.

High Initial Loan-to-Value Ratio

Some homeowners may have started with a minimal down payment or high-interest loan, resulting in a high loan-to-value (LTV) ratio. This means they initially borrowed a significant portion of their home’s value, making it easier to slip into an underwater mortgage if property values dip.

Economic Hardships

Personal financial crises, such as job loss, medical expenses, or other unforeseen challenges, can disrupt the ability to make mortgage payments. Falling behind on payments can compound the problem, making it difficult to recover.

Adjustable-Rate Mortgages (ARMs)

Homeowners with adjustable-rate mortgages may find themselves particularly vulnerable. When interest rates rise, their mortgage payments can increase significantly, straining their financial stability and making it more likely to fall behind on payments.

Location and Neighborhood Trends

Local economic factors, including changes in job opportunities and neighborhood developments, can impact property values.

If your home is in an area experiencing a decline in property values, you may be at risk of having an underwater mortgage.

Over Improvement or Renovation Costs

Sometimes, homeowners invest heavily in home improvements, thinking it will increase their property’s value. However, if the local real estate market doesn’t appreciate these upgrades, homeowners may not recoup their investment, exacerbating the underwater situation.

Understanding these contributing factors is essential for homeowners facing an underwater mortgage. It’s often a combination of these elements that leads to the sinking feeling of owing more on your home than it’s currently worth.

While the circumstances may seem dire, the journey to stay afloat financially begins with exploring the available options and understanding the choices that can help you navigate these turbulent financial waters.

Consequences of Falling Behind on Your Mortgage

In the realm of personal finance, few experiences are as anxiety-inducing as missing mortgage payments. The repercussions of this financial misstep can ripple through various aspects of your life, leaving a trail of consequences that extend far beyond the realm of homeownership.

The Domino Effect: Missing Mortgage Payments

Missing mortgage payments isn’t a simple oversight; it’s akin to tipping over a financial domino.

Each missed payment sets off a chain reaction of consequences that can impact your life in profound ways:

Financial Penalties

Mortgage lenders typically impose late fees for missed payments, adding to the already substantial financial burden. These penalties can escalate quickly, further straining your budget.

Escalating Debt

When you miss a payment, the amount you owe doesn’t disappear; it accumulates. The missed payments are often tacked onto the principal balance, increasing the total amount you owe.

Credit Score Damage

One of the most significant blows to your financial health is the damage to your credit score. Payment history is a crucial factor in credit scoring models, and even one missed mortgage payment can significantly lower your credit score.

A lower credit score can affect your ability to secure loans, credit cards, and even impact your insurance rates.

Interest Rate Hikes

A tarnished credit score can lead to higher interest rates on future loans, making borrowing more expensive. It’s a compounding effect that can haunt your financial decisions for years.

Risk of Foreclosure

If the missed payments continue, you risk the specter of foreclosure-the process through which the lender takes possession of your property due to non-payment.

Foreclosure is a serious legal proceeding with far-reaching consequences.

The Foreclosure Process and Its Implications

Foreclosure is a word that strikes fear into the hearts of homeowners facing financial hardship. Understanding this process is essential for anyone who has fallen behind on their mortgage payments.

Notice of Default

After you miss several payments, your lender will typically send a Notice of Default (NOD). This document officially informs you that you’re in breach of your mortgage agreement and gives you a specified timeframe to bring your payments up to date.

Pre-Foreclosure Period

Following the NOD, you enter a pre-foreclosure period during which you may still have a chance to resolve the situation. This might involve negotiating with your lender for a loan modification, repayment plan, or selling your home through a short sale.

Auction or Sale

If you can’t resolve the delinquency during the pre-foreclosure period, the lender may schedule your home for auction or sale. This is typically done through a public auction or a private sale, depending on state laws.


If your home is sold through a foreclosure auction and you haven’t vacated the property, eviction proceedings may follow. This can be emotionally and logistically challenging for homeowners and their families.

Implications of Foreclosure

The consequences of foreclosure extend well beyond the loss of your home.

Foreclosure results in the loss of your home, and the lender takes ownership. It also has a severe impact on your credit score, making it difficult to secure credit or loans for years.

Landlords and future mortgage lenders often consider foreclosure history when making rental or lending decisions. The stress, embarrassment, and emotional toll of losing your home can be immense, affecting your overall well-being.

Facing foreclosure is a daunting prospect, and it’s a situation that many homeowners desperately hope to avoid. However, it’s crucial to remember that there are often alternatives to foreclosure, such as loan modification, forbearance, or a short sale, which we will explore in later sections.

These options can provide a lifeline to homeowners struggling to stay afloat amidst financial turmoil. Understanding the consequences of falling behind on your mortgage is the first step towards making informed decisions and seeking solutions to regain financial stability.

Options for Homeowners Who Are Behind on Their Mortgage

When financial difficulties push homeowners into the turbulent waters of an underwater mortgage, it’s crucial to understand the life preservers available.

Homeowners who have fallen behind on their mortgage payments have several options, each with its own set of advantages and drawbacks.

Selling the House to a Professional Home-Buying Company

In addition to the options mentioned above, homeowners facing financial difficulties can also consider selling their house to a professional home-buying company.

These companies specialize in purchasing homes quickly, often in their current condition, providing homeowners with a way out of an underwater mortgage.

Pros of Selling to a Home-Buying Company

Selling to a home-buying company can be a swift solution, allowing homeowners to avoid the foreclosure process and the associated credit score damage. These companies typically buy houses as-is, which means you don’t have to invest in costly repairs or renovations.

The sale can often be completed in a matter of weeks, providing homeowners with much-needed liquidity.

Cons of Selling to a Home-Buying Company

While selling to a home-buying company can offer a fast exit from an underwater mortgage, it may not always yield the highest sale price compared to selling on the open market.

Homeowners should carefully evaluate the terms and conditions of the sale, as they may vary from one home-buying company to another.

Loan Modification

A loan modification is a formal alteration of the terms of your mortgage loan, often employed to assist homeowners facing financial hardship.

This process can include various changes, such as lowering the interest rate, extending the loan term, or even reducing the principal balance.

Pros of Loan Modification

One significant advantage of loan modification is its potential to render monthly payments more manageable.

This can be achieved through interest rate reductions or extending the loan term. Furthermore, in some cases, lenders may agree to reduce the principal balance, which ultimately lowers the total amount you owe.

Importantly, loan modification can help homeowners avoid the dreaded specter of foreclosure, allowing them to remain in their homes.

Cons of Loan Modification

However, loan modification is not without its challenges. Not all homeowners will qualify for this option, and the process can be complex and time-consuming.

While it may prevent foreclosure, a loan modification can still have a negative impact on your credit score. Moreover, while extending the loan term may reduce monthly payments, it could increase the overall cost of the loan.


Forbearance, on the other hand, offers homeowners a temporary pause or reduction in their mortgage payments. It is often granted by lenders during times of financial hardship, providing immediate relief while homeowners work to regain their financial footing.

Pros of Forbearance

Forbearance provides homeowners with short-term relief by temporarily reducing or suspending mortgage payments.

This can be especially helpful during periods of economic uncertainty or personal financial crises. Importantly, lenders usually refrain from initiating foreclosure proceedings while homeowners are in forbearance.

This means that, during this period, the threat of losing your home is temporarily lifted. Furthermore, your credit score is generally protected, as your lender acknowledges your temporary financial hardship rather than marking your payments as delinquent.

Cons of Forbearance

However, forbearance is not a long-term solution. It offers temporary respite but does not eliminate the debt or change the mortgage terms permanently. You will eventually need to make up the missed payments.

This might involve a lump-sum payment or a repayment plan, which can be financially challenging. While your credit score is protected during forbearance, the fact that you entered a forbearance program may still be noted on your credit report, potentially impacting future financial transactions.

It’s also essential to note that forbearance is typically reserved for specific situations, such as temporary job loss or medical emergencies, and may not be granted for extended periods.


Refinancing involves replacing your current mortgage with a new one, typically with more favorable terms. This can include a lower interest rate, a longer loan term, or switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

Pros of Refinancing

Refinancing can result in significant financial benefits. If you can secure a lower interest rate, your monthly payments will decrease, making homeownership more affordable. Extending the loan term can also reduce monthly payments, although it may increase the total cost of the loan over time.

If you switch from an ARM to a fixed-rate mortgage, you can gain stability in your monthly payments, protecting you from future interest rate hikes.

Cons of Refinancing

However, refinancing is not a guaranteed option, as eligibility depends on various factors, including credit score, income, and home equity. If your credit score has taken a hit due to missed mortgage payments, securing a favorable refinancing deal may be challenging.

The costs associated with refinancing, such as closing costs and fees, can be substantial and should be carefully considered. Moreover, extending the loan term, while reducing monthly payments, may increase the total interest paid over the life of the loan.

Selling an Underwater House

The notion of selling an underwater house can seem like a paradoxical puzzle. How can one sell a property when the debt owed on it exceeds its market value? It’s a question that perplexes many homeowners facing financial difficulties.

However, the answer is not a simple “yes” or “no.” Instead, it involves understanding the challenges, considerations, and strategies involved in selling an underwater property, particularly when considering selling to a company that buys houses.

The Possibility of Selling an Underwater House

The short answer is yes, it is possible to sell an underwater house. However, it comes with its fair share of complexities. When your mortgage balance is higher than your property’s current market value, you’re technically in a negative equity situation.

In such cases, traditional real estate transactions may not be straightforward, but alternative solutions exist.

Challenges and Considerations

Selling an underwater house presents several challenges and considerations. Let’s take a look at some of these considerations. 

Shortfall in Sale Proceeds

When selling an underwater property, it’s essential to understand that the sale proceeds may not be sufficient to cover your entire mortgage balance. This means that, upon closing the sale, you might still owe money to your lender, often referred to as a “deficiency.

Impact on Credit

Selling an underwater house, even with a deficiency, is generally less damaging to your credit than going through foreclosure. However, it may still have some impact, so it’s important to consider the potential credit implications.

Market Conditions

The state of the real estate market in your area can significantly affect your ability to sell an underwater house.

If property values are declining or there’s a glut of homes for sale, finding a buyer willing to pay a price that covers your mortgage debt becomes more challenging.

Lender Approval

Depending on your specific situation, you may need your lender’s approval to sell an underwater property, especially if you’re unable to cover the full mortgage balance.

Lenders may agree to a short sale, allowing you to sell the house for less than what you owe.

Strategies for Selling an Underwater House Effectively

When selling an underwater house, especially to a company that buys houses, it’s essential to have a well-thought-out strategy.

Here is some advice on how to go about it. 

Consult with Professionals

Seek advice from real estate agents who specialize in distressed properties or professionals experienced in selling to home-buying companies. They can provide valuable insights and guide you through the process.

Determine Market Value

Have a realistic understanding of your property’s current market value. An appraisal or a comparative market analysis (CMA) can help you assess its worth accurately.

Consider a Short Sale

If you’re unable to cover your mortgage balance through the sale, discuss the possibility of a short sale with your lender. In a short sale, your lender agrees to accept less than the full amount owed on the mortgage. This can be a viable option to avoid foreclosure.

Prepare the Property

To attract potential buyers, ensure your property is well-maintained and presented in its best light. While selling to a company that buys houses often involves selling as-is, a well-kept property can still increase its appeal.

Market Strategically

Work with a real estate agent or utilize marketing channels to reach potential buyers. Highlight the unique aspects of your property and its potential for improvement.

Negotiate Carefully

When selling to a home-buying company, be prepared to negotiate the terms of the sale. Understand the offer and how it compares to your mortgage balance and other costs associated with the transaction.

Understand Tax Implications

Consult with a tax professional to understand any tax implications of selling an underwater house, including potential consequences related to mortgage debt forgiveness.

Review All Offers

Carefully review all offers, even if they don’t cover your mortgage balance entirely. Consider the overall financial implications and your long-term goals.

Selling an underwater house can be a complex process, but with the right approach and guidance, it’s possible to navigate these challenging waters successfully.

Whether you’re selling to a company that buys houses or traditional buyers, thorough preparation and understanding of your options are key to achieving the best possible outcome in a challenging situation.

Short Sales and Their Role in Underwater Mortgages

In the realm of underwater mortgages, short sales emerge as a lifeline for homeowners struggling to stay afloat.

A short sale is a real estate transaction that plays a pivotal role in helping homeowners in underwater situations find a way out of financial distress.

Defining Short Sales and How They Work

A short sale is a real estate transaction in which a homeowner sells their property for a price lower than the outstanding balance on their mortgage, with the lender’s approval. In essence, it’s a way for homeowners to settle their mortgage debt, even when the proceeds from the sale do not cover the full loan amount. The shortfall is typically forgiven or negotiated with the lender.

The process typically unfolds as follows.

Financial Hardship

The homeowner experiences financial hardship, making it challenging to continue making mortgage payments. This hardship may be due to job loss, medical bills, divorce, or other circumstances.

Listing the Property

The homeowner decides to sell their property and lists it for sale on the open market, often with the assistance of a real estate agent.

Buyer’s Offer

A potential buyer expresses interest in purchasing the property but submits an offer that is lower than the outstanding mortgage balance.

Lender Approval

The homeowner, with the assistance of their real estate agent, submits the buyer’s offer to the lender, along with a hardship letter and other required documentation.

Lender Review

The lender reviews the homeowner’s financial situation, the property’s market value, and the buyer’s offer. If they determine that approving the short sale is financially advantageous compared to the costs of foreclosure, they may grant approval.

Closing the Sale

Upon lender approval, the sale proceeds like a traditional real estate transaction. The property is transferred to the buyer, and the lender typically forgives the remaining mortgage debt.

How Short Sales Help Homeowners in Underwater Situations

Short sales offer a lifeline to homeowners facing the challenges of underwater mortgages in several ways. Let’s take a look at these now. 

Avoiding Foreclosure

A successful short sale allows homeowners to avoid the devastating consequences of foreclosure. Foreclosure can result in eviction, significant damage to credit scores, and a lengthy legal process.

Short sales provide a more dignified exit from an unsustainable mortgage.

Minimizing Credit Damage

While a short sale can have some impact on a homeowner’s credit score, it is generally less severe than the credit damage caused by foreclosure. This can be crucial for homeowners seeking to rebuild their financial lives after a period of hardship.

Control Over the Sale

Homeowners have a degree of control over the short sale process, including the choice of a real estate agent, the acceptance of an offer, and negotiations with the lender. This control can be empowering during a challenging time.

Fresh Start

A successful short sale allows homeowners to close the chapter on an underwater mortgage and move forward with a more manageable financial situation. It provides an opportunity for a fresh start without the burden of excessive mortgage debt.

Legal and Financial Implications of Selling an Underwater House

Selling an underwater house involves a complex web of legal and financial considerations that extend beyond the basic real estate transaction.

It’s essential for homeowners to grasp the potential consequences and responsibilities associated with this process.

Legal Considerations

One of the primary legal aspects of selling an underwater house is obtaining lender approval, especially if the sale proceeds will not cover the full mortgage balance. Without the lender’s consent, the sale may not proceed.

Homeowners and lenders typically enter into a short sale agreement that outlines the terms and conditions of the sale. This agreement often includes details about the forgiveness of the deficiency, any potential contribution from the homeowner, and the timeline for completing the transaction.

Once a buyer’s offer is accepted, all parties involved must adhere to the terms of the sales contract. This includes timelines for inspections, appraisals, and other contingencies.

Financial Implications

Homeowners should be aware of potential tax implications associated with a short sale. In some cases, the forgiven debt (the deficiency) may be considered taxable income. However, tax laws can change, and some homeowners may qualify for exemptions or exclusions, particularly if the short sale occurs during a period of financial hardship.

In some states, lenders may reserve the right to pursue a deficiency judgment against the homeowner after a short sale or foreclosure. This judgment allows the lender to collect the remaining debt, even after the property is sold. It’s essential to understand the laws in your state regarding deficiency judgments.

While a short sale is generally less damaging to credit scores than foreclosure, it can still have a negative impact. Homeowners should be prepared for potential credit score reductions and work on rebuilding their credit over time.

Tips for Selling an Underwater House

Selling an underwater house can be a challenging endeavor. But, with the right strategies and guidance, homeowners can increase their chances of a successful sale.

Price Realistically

Setting the right asking price is crucial. Work with a real estate agent experienced in short sales to determine a competitive and realistic price that attracts potential buyers while covering your mortgage debt.

Prepare the Property

While selling to a home-buying company often involves selling as-is, making minor improvements or repairs can boost your property’s appeal. Ensure that it’s clean, well-maintained, and presents itself in the best possible light.

Stage Effectively

Staging can make a significant difference in how potential buyers perceive your property. Consider professional staging services to showcase your home’s potential.

Market Strategically

Work with your real estate agent to create a compelling marketing plan. Highlight the unique features of your property and use multiple channels, including online listings, social media, and open houses, to attract potential buyers.

Negotiate Wisely

Be prepared to negotiate with buyers. Understand that some buyers may be looking for a bargain due to the property’s underwater status, so approach negotiations with a willingness to find mutually beneficial terms.

Consider Short Sale

If your property is significantly underwater and you cannot cover the full mortgage balance with the sale, explore the option of a short sale. Consult with your lender and a real estate professional to understand the process and requirements.

Consult a Real Estate Agent

Collaborate with a real estate agent who specializes in underwater properties and has experience in short sales. Their expertise can be invaluable in navigating the complexities of the sale.

Make the Home Selling Process Easier

Selling underwater houses can be a daunting journey. Our mission is to provide homeowners with a lifeline, a way to navigate these challenging waters with confidence.

From short sales to fast, hassle-free purchases, we offer tailored solutions to fit your unique situation. If you’re ready to take the first step toward financial relief, contact us today for a no-obligation offer on your property.

Let us help you chart a course toward a brighter financial future. Don’t wait; reach out to us now, and let’s get started on your path to financial stability. 

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