Here's What Happens When You Want to Sell Your Home for Less Than Your Mortgage Balance

There may come a point when you want or need to sell your home and can't afford to wait. Maybe you lost your job and can no longer afford your monthly mortgage payments. Or maybe you have to move for a new job and can't put off a sale.

It's generally best to sell your home at a time when its value is up. But you might get stuck having to sell at a time when your home's value has declined.

In fact, your home's value might not be high enough when you sell it to pay off your mortgage. It's a situation that's known as being underwater on your home loan, and it's unfortunately not a great one to be in.

When you have to sell your home for less than what you owe

A few things might happen if you're selling your home for less than your mortgage balance. In some cases, you might have to dip into your own savings account to cover the difference.

Let's say you owe your mortgage lender $140,000 but your home can only sell for $130,000. In that case, you might have to take a $10,000 withdrawal from your personal cash reserves to make up that difference.

But that assumes you have the money. If you don't, then you may need to get your lender to agree to a short sale.

In a short sale, you sell your home at market value and your lender writes off and forgives the remainder of your mortgage balance. So in this example, a short sale would have your lender agreeing to take $130,000 to satisfy your mortgage in full.

A short sale is something your lender must agree to. You can't make the decision to sell your home for less than your mortgage balance on your own and expect your lender to just roll with it (though to be clear, you can make that decision if you're the one who will be making up the difference with your own cash reserves).

In some cases, a lender might say no to a short sale. But it will commonly say yes because a short sale is easier than going through the foreclosure process, and it might be less costly for the lender.

You should know, however, that a short sale will show up on your credit report, and it will stay there for seven years. That could cause your credit score to drop, making it harder to borrow money the next time you need to.

Some other options to look at

Perhaps you want or have to move immediately but your home can't sell for a price that will allow you to pay off your mortgage in full. In that case, one option to look at is keeping your home, renting it out, and waiting for its value to rise before selling.

This will generally only work if you can command enough rent to cover your costs of ownership. If your monthly mortgage payment is $1,200 and you can only rent out your home for $1,000, you may not be able to afford that $200 monthly difference.

All told, selling a home for less than your mortgage balance could have unfavorable consequences one way or another. So if you can somehow avoid that situation, you'll be better off for it.