People buy a house hoping to build equity, but sometimes homeowners wind up underwater, upside down or with negative equity. All those terms mean that the balance owed on the mortgage is more than the house’s current market value.
How Can You Wind Up With Negative Equity?
Housing prices rise and fall with changes in the market. If you borrow a large percentage of your home’s purchase price, even a small drop in its value can lead to negative equity. If you spend more for a property than it’s worth, your loan balance may exceed the home’s value. You can also be underwater if your house’s value drops because of damage or neglected maintenance.
Is Selling With Negative Equity a Smart Move?
In general, selling a house with an underwater mortgage is not a good idea. If possible, you should wait until you bring your equity into positive territory. You may be able to do that by continuing to make your regular mortgage payments, making extra payments, refinancing to get a lower interest rate or simply waiting for the housing market to improve.
What If You Have to Move?
If you need to relocate soon for some reason, you can’t afford your mortgage payments and don’t qualify for a refinance, or the house needs major repairs that you can’t afford, you may have to get the property off your hands. There are a few ways to do that.
One option is a short sale, which means you sell the house for less than it’s worth. Your lender may or may not agree to that, and a short sale will damage your credit, although not as much as a foreclosure. Depending on the state where you live, the lender may or may not have to forgive the difference between the loan balance and the sale price.
Another option is to sell your house, then pay the lender the difference between the sale price and your mortgage balance. That won’t damage your credit the way a short sale can, but you may have to drain your savings account or take out a personal loan to cover the difference.
Should You Accept Foreclosure?
If you’re in dire straits, you may feel that foreclosure is your only option. A foreclosure can hurt your credit, and it can take several years to recover. You may also have a hard time getting another mortgage for a period of time.
Your lender may agree to a deed in lieu of foreclosure. In that scenario, you voluntarily relinquish the deed to your home to avoid the foreclosure process. A deed in lieu of foreclosure can also damage your credit, but you may be able to negotiate somewhat favorable terms with the lender.
Weigh Your Options
If you’re underwater on your mortgage, it’s best not to sell your house if you can avoid it. If you have to move, discuss your options with your lender and a local real estate agent.