Can I Sell My Home for Less Than Owed on the Mortgage and Use a Personal Loan to Close?
When facing the situation where the value of your home is less than the amount you owe on the mortgage, you may wonder if you can sell it for less and still close the deal. This article explores the possibilities, particularly if you need to use a personal loan to make up the difference and how to handle such a scenario effectively.
Understanding Your Financial Situation
First, it is important to understand the specific circumstances of your situation. If you are selling the house for less than it is owed on the mortgage, it is because the home is underwater. An underwater home means the mortgage balance is greater than the current market value of the house. This can happen for various reasons, such as over-purchasing, a decrease in property values, or a combination of both.
Another factor to consider is whether you have refinanced the property. Refinancing means taking out a new mortgage to replace an existing one, often to get a lower interest rate, a different term, or to consolidate debts. However, refinanced mortgages are generally less likely to be forgiven as they are considered new loans, even if they replaced an older one with the same terms.
Short Sale Approvals
In some cases, you may need a short sale approval from the mortgage lender. A short sale is a legal process where the lender agrees to accept less than the full mortgage balance to settle the debt. Selling your home for less than the mortgage can negatively impact your credit score, but it can be a relief compared to the alternative of defaulting on the mortgage.
If you sell your home through a short sale, it is important to understand that the lender may still require the difference to be repaid or forgiven. Without a short sale approval, the lender may sue for the difference, known as a deficiency judgment.
Personal Loan to Bridge the Gap
In scenarios where the shortfall is not too significant, you may be able to obtain a personal loan to cover the difference. A personal loan typically has a higher interest rate compared to a mortgage and is funded by a financial institution. You can use this loan to pay the full mortgage amount at closing.
However, before proceeding with a personal loan, ensure you can qualify for it based on your credit score, income, and other financial criteria. Additionally, the reason for the loan should be transparent to the lender, as they are interested in the full settlement of the mortgage.
The Lender's Perspective
The mortgage lender is primarily concerned with receiving full and final settlement for the outstanding mortgage. They do not care how the settlement is arranged, whether it comes from a sale, a personal loan, or other sources. Therefore, if you have a personal loan that allows you to pay the mortgage in full, the lender should be satisfied.
If you are considering using a personal loan, ensure you communicate openly with your lender. Some mortgages may have specific terms or conditions that prevent the use of personal loans for this purpose. Be sure to check the terms of your mortgage agreement and consult with your lender before pursuing this option.
Proceed with Caution
While using a personal loan to settle your mortgage can be a viable solution, it is essential to weigh the pros and cons. Higher interest rates on personal loans can increase the overall cost of your debt. Therefore, carefully calculate the financial implications of taking out a personal loan and ensure you understand the terms and repayment plans.
Additionally, since personal loans are typically short-term, consider the long-term financial impact on your credit score and overall financial health. It is crucial to seek professional financial advice to make an informed decision that aligns with your long-term financial goals.
Ultimately, if you are in a situation where the value of your home is less than the amount owed on the mortgage, the options are limited, but they do exist. Short sales, personal loans, and open communication with your lender are key to navigating this complex financial situation successfully.