Editor’s note: All of HomeLight’s coronavirus information for buyers, sellers, and agents is available on our COVID-19 hub.

A sudden job loss or market dip can flip your entire world upside-down, threatening your ability to stay on top of your mortgage. When you’re underwater or sinking towards it, you need to proactively decide how to deal with your debt or your lender will make the decision for you: foreclosure.

“People need to understand to call first and ask for help instead of beg for forgiveness later,” shares top real estate agent Billy Alt, who sells 65% more single-family homes than the average Las Vegas agent. The sooner you reach out for help, the better your odds for financial recovery.

In this extensive guide, we’ll outline your options for taking control of a home that’s worth less than you owe, including how to sell your house if it’s underwater:

1. Stay in your house to build equity with a loan modification or forbearance.
2. Refinance with Fannie Mae’s High Loan-To-Value Refinance Option (HIRO)
3. Sell your home and cover the difference with cash.
4. Arrange a short sale with your lender.
5. Walk away voluntarily with a deed-in-lieu of foreclosure.
6. Face foreclosure as a last resort.

Start by finding out exactly where you stand

Face up to your fears and find out exactly how much you owe. Contact your mortgage servicer for details on your loan and lender.

“What most people don’t realize is that the bank you’re paying, whether it be Wells Fargo or whatever that company is, doesn’t actually own that loan necessarily. They’re just the servicer,” Alt shares. “They don’t have the final say. They have to get that approval. So it’s important to call your servicer before you miss a payment. And that’s the key — before you miss a payment — to work out that deal.”

You need to know whether your mortgage is owned by a private or government lender to determine what assistance programs you’re eligible for. You can find your mortgage servicer’s contact details on your monthly mortgage statement or look up your mortgage directly on MERS ServicerID using your mortgage identification number, address, or personal details.

Once you know where you stand, you can evaluate your options for moving forward. Let’s walk through these options from least to most considerable loss:

Option 1. Stay in your house to build up equity

If you’ve missed a few mortgage payments, ask your lender if a repayment plan is available. Typically these plans increase your monthly payments for 2 to 6 months until you catch up to your current debt.

Loan modification: 

A loan modification reduces your monthly payments so your mortgage is more affordable for your income. Any previously missed payments are tacked on to the overall amount owed.

Forbearance: 

With forbearance, your lender suspends or reduces your mortgage payments for an established period while you adjust financially. Depending on the lender, you pay back missed payments all at once when your mortgage resumes, gradually over time, or at the end of your mortgage.

If your financial hardship stems from the coronavirus pandemic and your loan is government issued (Fannie Mae, Freddie Mac, USDA loans, VA loans), then you have additional forbearance protection under the CARES Act:

• You have the right to request forbearance up to 180 days.
• You have the right to request a forbearance extension for up to another 180 days.
• No additional fees, penalties, or interest can be added to your account.
• You do not need to present documentation proving your financial hardship is related to the coronavirus pandemic.
• You are protected from some harm on your credit report.

Pros:

• You can keep your house.
• Your home may appreciate over time, reducing your debt.
• If you catch up to your mortgage, you won’t lose money on your home sale.
• Your credit score is not directly impacted (unless you apply for forbearance without protection from the CARES Act).

Cons:

• You’re still responsible for paying property taxes, maintenance, and HOA fees.
• You might owe your deferred mortgage payments in a lump sum.
• Forbearance is recorded in your credit history (unless you are protected under the CARES Act).

Go this route if…

• You love your home and would do anything to keep it.
• You can catch up to your mortgage with some help.
• Your home is appreciating or holding steady in value.

Avoid this route if…

• You’ve lost your source of income and do not anticipate replacing the income anytime soon.
• You would rather sell your home and cut your losses than continue battling on.
• You’re deep in debt in other parts of your life and can no longer sustain the costs of homeownership.

Option 2: Refinance Fannie Mae’s High Loan-To-Value Refinance Option (HIRO)

When you’re underwater, traditional refinancing is not usually a viable option since your Loan-to-Value ratio will likely exceed the maximum allowed by most lenders. However, if your mortgage is through Fannie Mae, you may qualify to refinance with the High Loan-To-Value Refinance Option (HIRO).

HIRO helps homeowners with little to no equity refinance to take advantage of historically low interest rates. This can help lower your monthly mortgage payments and make payments more predictable if you switch from an adjustable-rate mortgage to a fixed-rate mortgage.

To qualify, you must meet these eligibility requirements:

• You must have an existing mortgage with Fannie Mae.
• Your mortgage must have originated on or after October 1, 2017.
• You must owe at least 97% of your home’s current value if it is your primary single-family residence, or meet these loan-to-value requirements for multi-family homes, investment properties, and second homes.

Pros:

• You keep your home.
• You can take advantage of historically low-interest rates, saving significant amounts over the life of your mortgage.
• You can switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM), improving payment predictability.

Cons:

• You must meet all eligibility requirements.
• You’ll still need to put your head down and get ahead of your mortgage.

Go this route if…

• You want to keep your home.
• You meet the eligibility requirements.
• You’re confident you can catch up to your mortgage with a lower interest rate.

Avoid this route if…

• Your other debt is snowballing you towards a dire situation.
• You can’t afford your mortgage even with a lower interest rate.
• You’re ineligible.

Option 3: Sell your home and cover the difference with cash

If you have time on your side and want to sell your home the traditional way (your best shot at fetching maximum value), then work with a top real estate agent to list your home. You agent can help with the following, guaranteeing your home sells as fast as possible:

• Make light improvements to increase your home’s marketability
• Set an attractive listing price at or slightly below market value
• Market your home effectively to draw in buyers

Find a top real estate agent with HomeLight’s Agent Finder. We’ll match you with the three best candidates for selling your particular home. When interviewing agents, ask what the average days on market time is for your area. This will help you gauge whether or not it’s realistic to sell your home in time with your financial circumstances.

Sell your house instantly for cash with SimpleSale

If you need to sell ASAP, then HomeLight’s Simple Sale is a solid option. Provide us with information on your home online and we’ll match you with the highest bidder from our network of pre-approved cash buyers in 48 hours or less. If you accept the offer, you choose your moving date, typically within 60 days of closing. It’s that easy.

Pros:

• You free yourself from your mortgage.
• There is no impact on your credit score.
• When you sell your home for cash, you can expedite the closing process by eliminating the financing and appraisal contingencies from the contract. This could save you weeks or even months expenses related to the house, such as taxes, maintenance, and insurance.

Cons:

• Mustering up enough cash for the transaction is a feat if you’re already struggling to pay your mortgage.
• You’ll likely take a discount on price.

Go this route if…

• You can source the cash and want to cut your losses before your debt worsens.
• You’re not attached to your home enough to fight through.

Avoid this route if…

• You need to borrow money to pay the difference.
• You can catch up to your mortgage with other means of assistance.

Option 4: Arrange a short sale with your lender

In a short sale, your lender agrees to let you sell your home for less than you owe on your mortgage. You must provide your lender with a letter of hardship outlining the details of your financial difficulties.

When you list your home, you must disclose that your listing is a short sale on the MLS so buyers understand what they’re getting into — a sale that’s anything but short. Compared to the average 30-45 day closing period, a short sale can take anywhere between months to years to close due to the additional parties involved and legal guidelines.

After an arduous closing, you may or may not be on the hook for the difference between the sale price and your mortgage (the deficiency), depending on your state laws and financial situation.

Pros:

• Your lender may forgive some or all of the difference between the sale price and outstanding mortgage.
• You avoid foreclosure.
• You can rebuild your credit faster than you can with a foreclosure.
• You may be eligible for relocation assistance.

Cons:

• If your lender believes you have sufficient assets to pay your debt, they may continue pursuing you to pay the deficiency or pass the torch to a collection agency to follow through.
• Depending on your state, you may owe taxes on the difference that your lender forgives.
• You must disclose that your listing is a short sale on the MLS, which turns off some buyers.
• Short sales take months to years to close.
• Your credit can dip as much as 160 points, depending on your credit history.
• A short sale remains on your credit report as a derogatory item for up to seven years.

Go this route if…

• You cannot continue paying your mortgage for the foreseeable future.
• A short sale is your only option to prevent foreclosure.
• Home values are depreciating in your market, pushing you further behind on your mortgage.

Avoid this route if…

• You believe you can at least catch up to your mortgage with some time.
• You can wrangle a traditional home sale.

Option 5: Walk away voluntarily with a deed-in-lieu of foreclosure

• You give up your home on your own terms.
• You avoid the trauma of eviction from your own home (foreclosure).
• You do not need to pay the difference between the sale price and the outstanding balance of your mortgage.
• You do not participate in your home sale.
• You may be eligible for up to $3,000 in relocation assistance.
• In a credit review, a deed-in-lieu of foreclosure is viewed more leniently than foreclosure.
• A deed-in-lieu of foreclosure is often faster and less emotionally taxing than a foreclosure.

Cons:

• You lose your house.
• Your lender may require you to attempt to market and sell your home first.
• Your credit score plummets on average 50 to 125 points, depending on your credit standing.
• You cannot purchase another home for at least two years.
• You might still owe your lender cash, depending on your financial situation.
• You may owe taxes on the forgiven difference.

Go this route if…

• You’re underwater and cannot continue paying your mortgage for the foreseeable future.
• You need to sell your home, but do not have the ability or funds to participate in a sale.
• You want to avoid forcible foreclosure.

Avoid this route if…

• You can find any way to continue making mortgage payments.
• You can convince your lender to agree to a short sale instead.
• You have other liens against your property — your lender may force foreclosure instead to absolve rather than inherit this debt.

Option 6: Face foreclosure as a last resort

You will inevitably face foreclosure if you continue to default on your mortgage payments without acting on any of the above options. With foreclosure, your lender takes control of a property, evicts you from your home, and sells the property, usually at a foreclosure auction. To alleviate COVID-19 hardships, the CARES act specifies that lenders may not begin foreclosure against you until June 30, 2020.

Foreclosure is the most detrimental scenario, inflicting severe damage on your financial history and psychological health. If you’re heading towards foreclosure, seek professional assistance immediately to assess possible alternatives.

Pros:

• If you declare bankruptcy first, you may stay in your home longer, freezing all debt collection against you. Bankruptcy might also excuse you from paying your remaining mortgage and related taxes.

Cons:

• You lose your house.
• A lender can forcibly evict you with minimal notice.
• You’re ineligible to purchase another home for up to seven years.
• You still may owe a deficiency balance after your home sells at auction; 38 states permit lenders to pursue borrowers for this money.
• You do not receive relocation assistance compared to a deed-in-lieu of foreclosure.

Go this route if…

• You’re underwater, cannot continue paying your mortgage for the foreseeable future, and have no other options.

Avoid this route if…

• You can find any possible way to continue making mortgage payments.
• Your lender agrees to a deed-in-lieu of foreclosure instead.

Don’t face your underwater mortgage alone. Help is out there

• Real estate agents:  Real estate agents can advise you whether you should stay or sell your home and provide you with up to date information on market movements and government housing assistance programs. Find an agent who specializes in short sales and distressed properties with HomeLight’s Agent Matching Service.

• Housing counselors: Housing counselors approved by the Department of Housing and Urban Development (HUD) offer free foreclosure prevention counseling. Call the 24/7 HOPE Hotline at (888) 995-4673 or find a counselor online.

• Financial advisors: If your debt goes beyond your mortgage, a financial advisor can help you navigate your situation to mitigate losses and prevent bankruptcy. By shifting your finances around, you might be able to save your home or at least your credit.

Foreclosure attorneys: A foreclosure attorney can negotiate on your behalf with your lender to help you remain in your home and fight foreclosure in court. Reach out to a lawyer as soon as you receive a breach letter from your lender. The sooner your lawyer steps in, the better they can help you prevent your situation from worsening.

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