For a while, it seemed like being underwater on a mortgage had become a problem from another era.
Home values increased. Many homeowners built substantial equity. Even people who had struggled with their mortgages often discovered that rising property values had given them more options.
But real estate markets change.
If you've recently looked at what your home may be worth and compared it with what you owe, you may have discovered something you weren't expecting:
Your house may be worth less than the total amount you need to pay off.
And for some homeowners, this isn't the first time.
Maybe you previously received a loan modification. Maybe part of your mortgage balance was deferred. Perhaps you have a partial claim or second loan. Or maybe the market value of your property simply hasn't kept pace with what you owe.
Whatever brought you here, being underwater doesn't automatically mean foreclosure.
It means we need to understand the numbers and determine which options actually fit your situation.
First, Make Sure You're Really Underwater
Before assuming the worst, let's establish what “underwater” actually means.
Your home is generally considered underwater when you owe more on the mortgage than the property is worth.
But when you're considering selling, I want to go a little further.
The real question is:
Will the expected proceeds from the sale be enough to satisfy everything that needs to be paid for the transaction to close?
That requires more than comparing a Zillow-style estimate with the principal balance on your mortgage statement.
We need actual numbers.
Find Out What Your Home Is Realistically Worth
Start with the property.
What would a buyer realistically pay for it in today's market?
Not what the neighbor sold for three years ago.
Not what you need to get.
Not the highest automated estimate you can find online.
We need to look at current comparable sales, competing properties, condition, location and what buyers are actually doing in your local market.
A relatively small difference in value can matter enormously when you're close to the break-even point.
Then Find Out What You Actually Owe
This can be especially important if you've previously had mortgage assistance.
The principal balance displayed on your mortgage statement may not tell the entire story.
Depending on your history, there could be:
- deferred principal,
- a partial claim,
- a second mortgage,
- another recorded lien, or
- other amounts that need to be addressed when the property is sold.
For example, some mortgage assistance programs move amounts into a balance that becomes payable when the home is sold, refinanced or the mortgage otherwise ends. Consumer Financial Protection Bureau
That's why I want to see current payoff and title information before telling a homeowner how much equity they have.
What If I'm Only Slightly Underwater?
This is where we sharpen the pencil.
Suppose your home appears to be worth $600,000 and the total amount owed is $605,000.
That doesn't automatically tell us what kind of sale we're dealing with.
We still need to consider the costs involved in selling the property and determine the likely net proceeds.
We also need a good valuation.
If we're working with a rough online estimate, the house might actually support $620,000.
Or it might support $580,000.
Those are two completely different situations.
Before labeling the property a short sale, let's find out whether it really is one.
What If I Can Afford the Mortgage and Don't Need to Move?
Then being underwater may not require you to do anything immediately.
Property value matters most when you need to sell, refinance or otherwise access the equity.
If the mortgage is affordable, you like the home and you have no reason to move, waiting may be an option.
Markets change.
Values can rise or fall, and your mortgage balance may decline as you continue making payments.
Being underwater is a financial condition.
It isn't automatically an emergency.
What If I Need to Move?
Now the situation becomes more important.
Maybe you're relocating for work.
Maybe you're going through a divorce.
Maybe you've inherited another property.
Maybe your family needs have changed.
Or perhaps you simply cannot afford the mortgage anymore.
If you need to sell and the expected proceeds aren't enough to satisfy the obligations against the property, we need to determine how the shortage will be handled.
You might have the resources and choose to bring money to closing.
But if that's not practical, a short sale may be one of the alternatives worth exploring.
What Is a Short Sale?
A short sale occurs when a property is sold for less than the amount needed to satisfy the mortgage and the lender or mortgage servicer agrees to the transaction.
It is a form of mortgage loss mitigation and requires approval. Consumer Financial Protection Bureau
This is different from a normal home sale.
In a traditional sale with sufficient equity, the mortgage is paid off through escrow and the homeowner receives whatever proceeds remain after the mortgage, other obligations and selling expenses are paid.
In a short sale, there isn't enough money.
So we have another participant in the transaction:
The lender.
We need its approval to complete the sale under the proposed terms.
Do I Have to Be in Foreclosure to Do a Short Sale?
Don't assume you have to wait for foreclosure before investigating your options.
Short-sale eligibility depends on your loan, servicer, investor and circumstances.
The Consumer Financial Protection Bureau identifies short sales as one of several potential loss-mitigation options for homeowners having difficulty paying their mortgages, along with modifications, repayment plans, forbearance and deeds-in-lieu. Consumer Financial Protection Bureau
If you already know your mortgage is becoming unaffordable, there is no advantage in waiting until the situation becomes an emergency just to find out what the property is worth.
Start gathering information now.
What If I Previously Had a Loan Modification?
This is becoming an increasingly important question.
A previous loan modification doesn't automatically mean you can't sell your home or explore a short sale.
But it can make understanding your payoff more important.
Your modification may have changed the interest rate, extended the loan term or involved amounts that were deferred or otherwise incorporated into the modified loan. The CFPB notes that modifications can change both the monthly payment and the amount owed over time. Consumer Financial Protection Bureau
So if you modified your mortgage several years ago, don't rely on memory.
Let's look at the actual documents and current numbers.
What If I Have a Partial Claim?
This is another situation where homeowners can be surprised.
A partial claim may represent an additional amount that needs to be addressed when the property is sold.
You may not have been making a regular monthly payment on that amount, so it's easy to forget about it when estimating your equity.
Then you decide to sell and discover that your total obligations are higher than expected.
That doesn't automatically mean you can't sell.
It means we need to include the partial claim when calculating whether a traditional sale works or whether another solution may be necessary.
Could I Get Another Loan Modification Instead?
Possibly.
If your primary goal is to remain in the home and the mortgage is no longer affordable, contact your mortgage servicer to ask about available loss-mitigation options.
Depending on the loan and your circumstances, those might include a modification or another form of assistance. Consumer Financial Protection Bureau
But remember the larger question:
Would keeping the home actually solve your financial problem?
If another mortgage workout makes the home genuinely affordable and you want to stay, that's worth investigating.
If you're only postponing an unaffordable situation, selling may deserve consideration too.
What About a Deed-in-Lieu of Foreclosure?
A deed-in-lieu may also be available in some situations.
With a deed-in-lieu, the homeowner transfers ownership of the property to the mortgage servicer rather than selling it to a buyer. It is another potential foreclosure alternative, subject to approval. Consumer Financial Protection Bureau
That's different from a short sale, where the property is marketed and sold to a buyer.
Which alternatives are available depends on your loan and circumstances.
Don't Assume Foreclosure Is the Next Step
This is the part I want homeowners to understand.
There is a big gap between:
“My house is worth less than I owe.”
and
“I'm going to lose my house to foreclosure.”
Those are not the same statement.
You may be able to keep the property.
You may discover that you aren't actually underwater once we determine the true market value and payoff.
You may be able to sell and contribute a manageable amount toward the shortage.
You may qualify for a short sale.
Or another loss-mitigation alternative may be available.
We don't know until we look at the numbers.
Start With Four Numbers
If you think you're underwater again, start here:
1. Realistic market value
What would the property probably sell for today?
2. First mortgage payoff
What is actually required to satisfy the first mortgage?
3. Other obligations
Are there deferred balances, partial claims, second mortgages or other liens?
4. Expected selling expenses
What will it realistically cost to complete the sale?
Once we have those numbers, we can determine whether you're dealing with a traditional sale, a small shortage or a potential short sale.
Being Underwater Again Doesn't Mean You're Out of Options
Real estate markets change.
Mortgage balances can be complicated.
And sometimes homeowners who thought they had rebuilt equity discover that they aren't in the position they expected.
Don't panic—and don't ignore it.
Find out what the property is worth and what you actually owe.
At Midas Realty Group, we work with Southern California homeowners facing complicated mortgage situations, including homeowners who owe more than their properties can realistically sell for.
If you're trying to determine whether you can sell traditionally or whether a short sale may be necessary, we can start with the numbers.
You don't need to know the solution before you call. We just need to figure out the problem first.
This information is for general educational purposes and is not legal, tax or financial advice. Foreclosure and loss-mitigation situations can involve important deadlines and individual circumstances. Consider consulting an appropriate attorney, HUD-approved housing counselor, tax professional or other qualified adviser when needed.
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