Many people consider homeownership a safe long-term investment. After all, overall home values have trended upward in every decade from 1940 to 2000, according to the U.S. Census. But despite rising property values, owning real estate (like most investments) doesn’t guarantee a profitable return. So it can be particularly painful to find yourself in a situation when one of your only options includes selling your house at a loss.
Maybe you got caught up in a bidding war, bought at a market peak, and now buyer interest (along with home values) has since cooled. Or you’ve experienced a sudden and extreme change to your financial situation, such as a layoff or death in the family. Whatever the circumstances, you should act early if you’re suddenly struggling to make your monthly mortgage payment. Selling at a loss is one option — but there are other avenues you can explore before taking that step.
Start By Requesting an 'As Is' Cash Offer
We’ll compare your offer side-by-side with an estimation of what you could fetch on the open market so you can make an informed decision.
For insight about selling a home during a turbulent financial time, we spoke with real estate pro Kim Batterman, a single-family home expert based in the Fox Cities area of Wisconsin. Batterman works with 74% more single-family homes than the average agent in the area.
We also connected with HomeLight’s Senior Lender Sales Manager Richard Helali, who offered an insider’s look at mortgage options that could help you hold on to your home — or let it go without falling into foreclosure.
Should you sell your house at a loss?
When to consider selling at a loss
If thoughts of your mortgage payment (combined with upkeep costs) keep you up at night, it may be time to sell. These are some reasons that selling at a loss could make sense — and free you from a financial bind that’s been weighing on you.
You fall behind on your mortgage payments and can’t seem to catch up
Perhaps you underestimated how much it costs to own and maintain a home. Or your company eliminated your long-time position, and you’re going back to school. Maybe you’re facing catastrophic medical bills. You run the risk of foreclosure if you miss too many payments. Selling, even at a loss, could be the better alternative.
You owe significantly more than your home is worth — and you’re struggling financially
Maybe the real estate market took a dive, and you went overboard on past home renovations. You’re maxed out on second loans, and now you owe more than your home’s value. Whatever the reason, you’re struggling to keep up with house payments, and you don’t see things changing anytime soon.
Your home value dropped, but you can still manage the mortgage payments
You may feel lousy after buying at a market peak, right before home values plummeted. But if you can still manage the payments and upkeep, it may be beneficial in the long run to hold on to your home if your original plan was to live in the house for the long term. Since overall home values have increased since 1940, you could recover some or all of your home value when the market recovers.
Homeownership isn’t what you expected
Perhaps you rushed into buying, and homeownership feels more like a burden than an achievement. Now you want to free yourself from a large monthly mortgage payment and the cost of maintaining a home. After all, moving abroad and working remotely sounds more appealing than cleaning gutters and raking leaves.
Before you jump into a nomadic lifestyle and take a loss on your home, evaluate how much you stand to lose, along with the long-term financial ramifications, if you sell at a market low. How long will it take you to recover from the loss? Would it be better to hold off for now and wait until the market cycles back in your favor? If you can stand to wait, you could pursue a lifestyle change without the financial setback of losing money on your home.
You want to buy a different house
You just stumbled upon your once-in-a-lifetime dream house and need to sell your current home quickly, even if it means losing some of your equity. If you’re getting a great deal on the new house and think the home will appreciate in the long run, selling could be a smart risk. But if you lose money on your current home while piling on additional financial stress with a higher house payment, you may want to reevaluate selling.
Alternative solutions to selling at a loss
If you’re in a temporary financial bind and struggling to pay the mortgage, hanging a for-sale sign on your lawn isn’t the only option. Consider alternative options if you’re determined to keep your home rather than selling it for less than you paid.
If you’re feeling the pinch financially, look into those options sooner than later. “Start that process immediately,” Helali encourages. If “they’re in a situation where [making the mortgage payment] is going to be a problem, even if they haven’t missed any payments yet, reach out to the loan servicer and see what options may be available.”
Hold on until home values recover
Before you rush to sell when market values are low, think about whether you can hold on — at least until prices start trending upward. Look into temporary income-boosting solutions such as renting out a spare bedroom on Airbnb, applying for a second job, or launching a side hustle.
Refinance your existing mortgage loan
Determine whether a refinance loan could lower your monthly payment to allow for extra breathing room in your monthly budget. If you qualify and your home appraises at the necessary value, a lower interest rate or longer loan term (30 years instead of 20, for example) could drop your monthly payment to an affordable amount.
A refinance loan comes at a cost, though. Closing costs generally run 2% to 6% of the loan amount, although no closing cost options exist (that is, they’ll be lumped in with your principal, or you’ll pay a higher rate).
If you’re feeling the heat financially, Helali stresses that you shouldn’t wait if you think refinancing is the best option. “More options may be available to you if you haven’t been late on your mortgage,” he says. Lenders generally won’t approve a refinance loan if you’re already behind on your mortgage payments.
Negotiate a loan modification
Refinancing isn’t an option for everyone, especially if your home’s value has dropped and you no longer have enough equity or income to qualify. Another option you can explore includes a loan modification or a negotiated agreement with the lender to change your loan terms.
A modification could reduce your monthly payment by granting additional years to pay off the balance, lowering your interest rate, or reducing your loan balance. Not all lenders may offer a loan modification option, so contact your mortgage provider directly if you’re considering this solution.
Ask for a loan forbearance
If you’re in a temporary financial slump and just need a few months to recover, you may be able to work out a forbearance agreement with your lender. Your lender agrees to let you skip or reduce your monthly payment for a set period of time. This option gained national attention among homeowners during the 2020 pandemic when the federal government implemented the CARES Act for economic relief. CARES Act funds expired on September 30, 2021.
If your lender agrees, forbearance doesn’t forgive your debt, though. You’re still on the hook for the mortgage, and your lender simply grants a temporary reprieve for payments.
Get a Free Home Value Estimate
Enter a few details about your home and we’ll provide you with a preliminary estimate of home value in less than two minutes. This won’t be a guarantee of what your home will sell for, but it is a helpful starting point.
Short sale: Selling when you owe more than your home is worth
You may reach a point when alternative solutions to keep your home don’t resolve your financial concerns. In certain cases, selling your home remains the most logical choice. But there’s one caveat to selling: If your mortgage balance exceeds your home’s value, you could end up paying the difference out of pocket when you sell. That is, unless your lender agrees to a short sale with a deficiency waiver.
In a short sale situation, the mortgage lender allows you to sell your home for less than the remaining loan balance. Laws in some states hold the homeowner responsible for the difference between the loan balance and purchase price unless the lender waives the right to collect by issuing a deficiency waiver. Most states allow lenders to pursue a judgment against the borrower after a short sale. Laws in a few states, such as California and Nevada, prohibit deficiency judgments in some circumstances.
One benefit of a short sale: it doesn’t affect your credit as much as a foreclosure or bankruptcy, say Helali and Batterman. Instead of waiting seven years before you’re able to qualify for a conventional loan with a foreclosure on your credit record, you may qualify for a new mortgage two to four years after a short sale, Helali explains.
Short sales have their drawbacks, though. You’ll need to prove substantial hardship to the lender with documentation. “The banks are going to send you documentation that asks what assets you have, and you’ve got to explain, identify, and then prove what assets you have or don’t have.” It’s a complicated and time-consuming process, Batterman warns.
Deed in lieu of foreclosure: Your final option before foreclosure
A deed in lieu of foreclosure retains similarities to a short sale. But instead of selling your home to a third-party buyer, you transfer ownership to your lender to avoid a forced foreclosure. Similar to a short sale, you may need to request a deficiency waiver in writing from your lender to cancel any outstanding debt liability.
Tax implications: Is your loss deductible?
After taking a loss on the sale of your home, can you at least deduct the amount on your income tax return? Unfortunately, in most cases, probably not.
According to IRS rules, you can’t claim a capital loss against personal property, including a primary residence, on your tax return. (Loss to business property is a different story.)
Converting your home to an investment property probably won’t benefit you. That’s often because the IRS values the home based on the date you convert your home for business or investment use, not the date of the original purchase. For illustration, take a look at the following scenarios.
English (US) · 