If you bought and financed your home at a time when the real estate market was booming, there might come a time when you realize that the mortgage against it is more than the property is now worth. When property values drop, homeowners can find themselves "underwater." If they need to sell the home, for any number of reasons, they can't get enough to cover all of what they owe on it.
You Can Negotiate a Short Sale
A short sale occurs when you convince your lender to let you sell your property for what it's worth on the current market, even when this is less than the amount you owe. In many states, the lender "forgives" the difference between the property's value and the mortgage balance.
One problem with this option is that you must convince the lender that you're having financial problems, you can't pay the mortgage, and your only other option is foreclosure. Your lender probably won't approve a short sale just so you can move to a home you like better.
A Short Sale May Damage Your Credit
Another problem with a short sale is that it will hurt your credit. If you absolutely have to sell the property, you may have no choice. However, the short sale will probably appear on your credit report for years to come as "discharged" or as a "pre-foreclosure" action.
You Can Finance the Buyer's Mortgage
A contract for deed is a deal between you and a buyer. The buyer agrees to make monthly payments to you rather than to a mortgage company. Seller financing usually occurs when a house has no mortgage against it. If your house is under water, you'll need the approval of your lender.
You Can Rent the Home
Until the real estate market improves, you can rent your home to a tenant for enough to cover the mortgage payments. If you want to buy another home, however, it may be difficult to qualify for a new mortgage if you're still responsible for paying the first one. Most lenders will not consider the rent you receive as income.
You Can Pay the Difference Yourself
If you have cash on hand, you can sell the property for what it's worth and pay your mortgage lender the difference. Your credit rating will be unaffected and you'll be out from under the old mortgage, so you can qualify for a new one. For this to work, you will need enough cash to both satisfy the old mortgage and put a down payment on a new house.
A Real Estate Lawyer Can Help
The law surrounding sale of an "underwater" home is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a real estate lawyer.