Selling a Home When Owing More Than It's Worth

By Business & Finance Last updated Tuesday, July/02/2024

Make Up Difference

The easiest way to sell a home when you owe more than it is worth is to sell the home for its current market value and make up the remaining balance. Although this is the easiest option, it requires you to possess enough cash to make up the difference. If your credit score is high, you can possibly take out a personal loan with your bank or credit union that accounts for the difference.

If you do not possess the funds necessary to make up the difference, you may want to consider a short sale. A short sale results from you negotiating with your mortgage lender to accept a lower pay-off amount than what is owed on your mortgage. For example, a buyer offers your $165,000 to buy your home, the value of your home is $150,000 and you owe $180,000 on your mortgage. You can contact the department that handles short sales at your lender's office to see if they are willing to consider accepting your mortgage as paid in full if you pay $165,000. Your mortgage lender is not obligated to accept a short sale. However, lenders are typically more willing to consider short sales in a down housing market when foreclosures are high.

Your credit score may suffer during the process of a short sale. This is mainly because a home owner needs to experience financial hardship for a lender to consider a short sale. In most cases, homeowners have already missed mortgage payments. However, a short sale is more favorable to your credit score than a foreclosure. You should read your loan agreement carefully before negotiating a short sale. You want to make sure that your lender releases your deed upon paying the negotiated price. Some lenders’ policies do not allow them to give up the rights to your mortgage debt unless it receives payment in full.

The tax implications of a short sale depend on the capital gain or loss incurred. According to Bill Bischoff of Smart Money, the IRS may require you to pay taxes if you incur a capital gain during your short sale. For example, if you sell your home for more than the original price you paid, you must pay tax on the gain even if your mortgage is more than your current selling price. If you suffer a capital loss, you cannot take an IRS deduction.