Can You Sell Your House Back to the Bank? Understanding Your Options

Every household is unique, and personal finances can shift over time. While you may have been able to afford your mortgage when you purchased the house, employment changes and other monetary factors may make it hard to keep up with monthly payments. You aren’t alone. There are currently 6.6 million Americans who struggle to pay their mortgage, accounting for as high as 15% of homeowners in parts of the country.  

Some homeowners wonder if they can sell their house back to the bank during this time. That may be an option, or there could be other ways to move out of your home while protecting your credit and finances. Use this guide to answer, “Can you sell your house back to the bank?” and learn what the process looks like.

What Does It Mean to Sell Your House Back to the Bank?

When someone says they are selling their house back to the bank, it usually means they are pursuing a deed in lieu of foreclosure. This means the homeowner surrenders ownership of the house instead of navigating the foreclosure process. Foreclosure can significantly drop your credit score, with some homeowners noticing drops of more than 100 points. This means it will be harder to secure loans in the future, and the loans you are approved for will be more expensive. 

Selling a house back to the bank is different from a short sale and foreclosure. A short sale occurs when a homeowner sells the home for less than the loan is worth. The lender must agree to accept less than the loan’s terms in payment, or the homeowner must personally pay the remaining debt. Short sales usually cost the lender less than foreclosure. 

Foreclosure is when the bank repossesses the home when the owner stops making payments. Homeowners must have 90-120 days of missed payments before they can be foreclosed on. The eviction process can take even longer. 

Homeowners struggling to make payments need to decide which option is best for their credit, long-term finances, and emotional health.

When Selling Back to the Bank Might Be an Option

A deed in lieu of foreclosure isn’t always viable, but there are times when this might be the right call. Here are a few instances when you could review your options to see if selling your home back to the bank is the best decision. 

• You are missing mortgage payments: Homeowners who worry about finding funds for their monthly payments may need a different housing situation. 
• You have negative equity: This means you owe more on the loan than the house is currently worth. This is another term for an underwater mortgage. For example, if you bought a house for $500,000 and the fair market value drops to $400,000, but you owe $450,000, then you have negative equity. 
• Other solutions have failed: Selling your house to the bank usually isn’t an ideal option for homeowners. Look into loan modification or refinancing to find better options that may allow you to keep your house.
• The bank agrees to take ownership: Most homeowners cannot simply give their homes back. The bank needs to agree to the terms first. 

Many lenders want to work with homeowners to ensure they make their payments and maintain an active loan. The bank might not immediately accept the sale of your house and might want to review other financing options to make sure you pay off the remaining balance.

“It’s crucial to consult your lender early to protect your credit and equity,” says Mike Saladino, a Realtor at Keller Williams ONEChicago.

The Process: How to Sell Your Home Back to the Bank

If you are unable to make your mortgage payments, you can start the process of selling your home to the bank as a foreclosure alternative. This is what the ownership transfer looks like.  

• Contact your mortgage company to discuss financial hardship options. They may be able to temporarily pause your payments (known as forbearance) if you are experiencing short-term stress, like a job loss. There may be other mortgage forgiveness and assistance programs available. 
• Submit documentation proving you need help. You may need to share your bank statements, write a hardship letter, and highlight how you cannot pay your mortgage in any way. 
• Your bank will request a property inspection and valuation. This will gauge how much your house is worth. For example, if your home is in poor condition, it may have dropped in value compared to similar houses in your area.
• You will sign a deed in lieu of foreclosure agreement. This transfers ownership to your mortgage lender. 
• You will vacate the property. 

There is no way to continue living in the house once your mortgage company takes over. The house will likely be cleaned and prepared for listing on the real estate market because the bank does not want to own it. The bank’s goal is to sell the property and recoup the funds lost from your mortgage debt.

Pros of Selling Your House Back to the Bank

There are benefits and drawbacks to selling your house back to the bank. The main benefit is that you avoid foreclosure. You are less likely to damage your credit history, and you can take steps to buy another house when you are financially ready. Selling your house to the bank also reduces or eliminates your remaining mortgage balance. If you are struggling financially, this is one less bill. 

Homeowners choose this option when they want a faster resolution and emotional relief from the missed mortgage payments. They don’t have to go through the arduous foreclosure process or try to list their properties as short sale homes. Within a month or two, they can be free from the house.

Cons of a Deed in Lieu of Foreclosure

Selling your house to the bank still comes with risks that need to be thoroughly reviewed. This process can still affect your credit and future borrowing power. If you choose this option, you will lose ownership of the home and any equity you built over time. You might even face a higher tax bill if the canceled debt is considered income. 

Furthermore, not all lenders accept a deed in lieu of foreclosure. Just because you are in financial trouble doesn’t mean the bank will buy your house. You might need to work with your lender to find other ways to reduce your mortgage debt or lower your monthly payments.

“You will want to speak with a real estate attorney as well as a CPA before doing so, as there can be tax liabilities even if you have no equity,” says Michael Tessaro, a real estate agent from Fremont, California.

Alternatives to Selling Your House Back to the Bank

You don’t necessarily need to sell your house back to the bank if you are overwhelmed by your outstanding mortgage balance. Here are four options to consider that may be better, depending on your finances and the local real estate market.

1. Short Sale

You may be able to avoid foreclosure with a short sale. This allows you to sell the home for less than what’s owed, with lender approval. A bank or lender may approve this option if they want to receive as much of the loan as possible based on the fair market value of the property. This option is also preferred by banks that don’t want to purchase homes. 

With this method, you will hire a real estate agent, and they will assist with the short sale. Your credit will likely still be impacted, and may take time to recover.

2. Loan Modification or Forbearance

Lenders want to avoid foreclosure as much as homeowners do, so your bank may approve forbearance, temporary pauses, or adjustments to loan terms if it means you can pay your loan off in the near future. For example, if you were recently laid off, the bank may offer a six-month pause so you can find a job. Even if your lender doesn’t stop your payments, they may agree to temporarily lower them, reducing your financial burden. 

Starting a conversation with your lender and reviewing your options is often considered better than neglecting payments entirely.

3. Refinancing Your Home

You might also be able to refinance your home, depending on the local market. Refinancing could lead to a lower monthly bill, either by spreading out the payments more or taking on a lower interest rate. Use a mortgage calculator to see how rate changes can affect your payments. Here are a few examples of how changes can help you. 

• A $300,000 loan at a 6% interest rate would have $2,500 due monthly for a 15-year mortgage. Refinancing to a 30-year loan drops the payments to $1,800. 
• The same $300,000 loan at a 5% interest rate instead of 6% brings the payments to $1,610 for a 30-year rate. 

There are options to adjust your loan based on the economic factors in the current market. Let your lender help you review your options.

4. Renting Out the Home

If you want to avoid a short sale or foreclosure, consider maintaining the property and renting it out. Talk to an experienced real estate agent and review the market value from a renter’s perspective. Here are a few things to consider if you want to rent your space: 

• How much income will rent bring in compared to what you owe the bank monthly? 
• Where will you live while your house is being rented out – and how much will it cost? 
• Will the rent cover all costs associated with the home, or will you still be responsible for taxes, HOA fees, utilities, and other bills? 

There also isn’t a guarantee that you will immediately find a renter. Some houses sit empty for a few months while the owner or Realtor tries to find prospective tenants.

5. Selling on the Open Market

Finally, you can also hire a real estate agent to sell your home before you default on the loan. This option might do the least amount of damage to your credit while also allowing you to keep any sale proceeds.

Your agent will run a comparative market analysis and identify a fair listing price for the home. They can try to market your property competitively to potential buyers and will strive to get as much money as possible while still working quickly. 

There’s no guarantee that a traditional home sale will be fast. However, if you have a few months of leeway, this could help you avoid problems with the bank while protecting your financial future.

How a Real Estate Agent Can Help Distressed Sellers

If you are stressed about your outstanding mortgage, start a conversation with a real estate agent. A trusted Realtor can review your finances and help you decide whether to sell your house or pursue other options. They can give you a fair listing price that provides an honest look at what your home is worth. 

Seasoned Realtors also understand short sales and pre-foreclosures. They will know where you are in the process and can provide guidance on how to negotiate with lenders. 

You don’t have to go through this process alone. Let your Realtor review your financial situation and provide viable solutions that could have a minimal credit impact.

Know All Your Options Before You Decide

Selling your home to the bank to pay off your remaining mortgage is rarely the first choice for many homeowners. There are other options if you owe money and are worried about paying. Consider meeting with financial advisors, Realtors, and even lawyers to review your options. They can provide multiple solutions and review the pros and cons of each.

Take action early if you are financially stressed. This will allow you to pursue more solutions that can protect your assets and credit.

Turn to FastExpert to find local agents who can start the real estate transaction or advise you on the mortgage process. You can review agent profiles, request appointments, and find the best fit for your situation. 

If money is tight, you need someone on your side. Let the professionals at FastExpert review your options, whether that means pursuing a short sale, traditional listing, refinancing, renting, or sale back to the bank. You don’t necessarily have to foreclose.