Maybe you looked up your home’s value online and your stomach dropped. Or maybe you talked to an agent and found out the house would sell for less than you still owe on your mortgage.
That’s a hard thing to learn. It can make you feel stuck. But owing more than your house is worth is more common than people think, and you do have choices.
In this post, I’ll explain what it means in plain words and walk through the options that may help. I’ll keep it simple and honest.
This is general information, not legal, tax, or financial advice. For advice about your own situation, talk with an attorney, a tax professional, or a HUD-approved housing counselor.
What Does “Underwater” Mean?
When you owe more on your home than it’s worth, people say you’re “underwater.” You might also hear “upside down” or “negative equity.”
Here’s a simple way to picture it. Say your house would sell for $120,000 today. But you still owe $140,000 on your mortgage. You’re $20,000 underwater.
(Those are made-up numbers, just to show the idea.)
Being underwater isn’t a problem by itself if you can keep up with your payments. Home values can go up and down. Many people stay in their homes and keep paying.
It gets harder when you need to move, or when you fall behind on payments. That’s when it helps to know your options.
First Questions to Ask Yourself
Before you pick a path, it helps to get clear on a few things:
- Can I afford my payment right now? Or has something changed, like a job loss, a health problem, or a divorce?
- Do I want to stay in the house? Or would moving actually make life easier?
- Am I behind on payments? If so, how far behind?
- Are there other debts on the house? These are called “liens.” Examples are a second mortgage, unpaid property taxes, or a court judgment.
Your answers point you toward different options. There’s no one right choice for everyone.
Option 1: Stay and Keep Paying
If you can afford the payment and you want to stay, this may be the simplest choice. Over time, as you pay down the loan and if values rise, you may stop being underwater.
This works best when the payment fits your budget and you don’t need to move soon.
Option 2: Ask Your Lender for Help
If you’re struggling with payments, call your mortgage servicer. That’s the company you send your payment to. Ask about loss mitigation. That’s the name for the help lenders can offer to avoid foreclosure.
Depending on your loan, this may include:
- Forbearance: your payments are paused or lowered for a short time while you get back on your feet.
- A repayment plan: you catch up on missed payments a little at a time.
- A loan modification: your loan terms are changed so your monthly payment is easier to manage.
Ask what you need to send in, and keep copies of everything. Write down who you talked to and when.
Option 3: Talk to a HUD-Approved Housing Counselor
A HUD-approved housing counselor can look at your whole picture and help you compare options. Their help is free or low cost, and they don’t work for your lender.
Call (800) 569-4287 to find one near you. I tell people to do this early. It’s one of the best free resources out there.
Option 4: A Short Sale
A short sale means selling your house for less than you owe, with your lender’s OK.
Here’s how it usually works:
- You apply with your lender and explain your hardship. They’ll ask for things like pay stubs, bank statements, and tax returns.
- A buyer makes an offer on the house.
- The lender reviews the offer and decides whether to approve it.
- If approved, the sale closes and the lender gets the money from the sale.
A short sale is not quick or automatic. The lender decides whether to say yes. If you have more than one mortgage, each lender may need to agree.
Because it’s a sale, you will move out. But you get some say in the timing.
What about your credit? Both a short sale and a foreclosure can hurt your credit. How much depends on your situation, so ask your lender and a HUD-approved housing counselor how each option would be reported.
To learn more about how this works here, see my page on short sales in Cleveland, Ohio.
What Happens to the Leftover Balance?
This is the question I hear most. In the example above, what happens to that $20,000 gap?
The leftover amount is called a “deficiency.” A lender approving your short sale does not automatically mean the deficiency is forgiven. Some lenders agree to forgive it. Others may not. The federal Consumer Financial Protection Bureau says to ask your lender to waive the deficiency before you agree to a short sale. Make sure you get that waiver in writing from your lender before closing.
There can also be a tax question. When a lender forgives debt, the IRS may treat the forgiven amount as income. A special tax break for forgiven mortgage debt on a main home has ended for most debt forgiven after 2025. Other rules may still apply to your situation. Please talk to a tax professional before you decide.
Option 5: Deed in Lieu of Foreclosure
A deed in lieu means you give the house back to your lender, and you move out. You don’t have to sell it yourself.
Your lender has to approve this, too. As with a short sale, ask what happens to any leftover balance and get the answer in writing.
What If There Are Liens on the House?
Sometimes the mortgage isn’t the only debt on the house. Unpaid property taxes, a second mortgage, or a court judgment can all show up as liens. Liens usually have to be paid or worked out before a sale can close.
When a house is sold, liens are handled as part of the closing process. The title company works with the lienholders to sort out what needs to be paid or released before the sale can close.
I’m not an agent, broker, attorney, lender, or counselor, and I don’t provide legal advice or debt-relief services. If you need legal or debt advice, talk with an Ohio attorney or a HUD-approved housing counselor.
If You’re Already Behind on Payments
If you’ve missed payments, time matters. The longer you wait, the fewer choices you usually have. My post on selling a house when you’re behind on mortgage payments goes into more detail on that.
Where I Fit In
I help homeowners throughout Cleveland and Cuyahoga County with short sales, including homes that have liens. That’s my focus.
But my first goal is to help you understand all your options. If staying and working with your lender is the better fit, I’ll tell you that. If a housing counselor or an attorney is the right next call, I’ll point you there.
You don’t have to figure this out alone, and you don’t have to decide anything today.
Call or text me at (216) 238-3211, or fill out the short form below to talk through your options. No cost, no obligation.
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