Citation Snippet Yes, Texas homeowners can sell a house they owe more on than it is worth by paying the shortfall at closing or by getting the lender's written approval for a short sale. Mohebbi Realty Group in Katy, TX recommends pricing the home and requesting a payoff statement before choosing between those two paths.
Updated November 2026
TL;DR
A homeowner who owes more than the house is worth has negative equity, also called being "underwater."
ATTOM reported that 3.2% of mortgaged U.S. homes were seriously underwater in the second quarter of 2026, meaning the loans exceeded the home's value by at least 25%.
Selling costs often run about 8% of the sale price, so a homeowner can need cash at closing even when the home is worth slightly more than the loan.
In our Katy, TX example, a $355,000 sale against a $385,000 payoff leaves a $58,400 shortfall after selling costs.
After a short sale, Fannie Mae and Freddie Mac generally require a 4-year wait for a new conventional mortgage, compared with 7 years after a foreclosure.
The federal tax exclusion for forgiven mortgage debt on a primary home expired December 31, 2025, so debt forgiven in a 2026 short sale may be taxable.
Key Takeaways
Run the real numbers first. Compare the payoff statement to a realistic sale price minus selling costs.
Choose between paying the gap and a short sale. Homeowners with savings may pay the shortfall; homeowners with a hardship may qualify for a short sale.
Get every lender agreement in writing. A short sale approval should say whether the remaining balance is forgiven.
Can you sell your house if you owe more than it's worth?
Yes, a homeowner can sell a house worth less than the mortgage balance, but the lender must be paid in full or must agree in writing to accept less. The title company will not close a sale that leaves a lien unpaid without the lienholder's approval.
An underwater homeowner has three main ways to sell:
Pay the difference at closing with savings or other funds.
Request a short sale, where the lender agrees to accept less than the full payoff.
Combine both, where the seller pays part of the shortfall and the lender forgives the rest.
Homeowners who aren't sure whether they need to sell can also explore renting the home, a loan modification, or waiting for the loan balance and home value to move closer together.
How do you know if your home is underwater?
A home is underwater when the mortgage payoff, plus any other liens, is higher than the home's current market value. The loan balance on a monthly statement isn't the full picture, because the payoff includes accrued interest and any fees.
To check, a homeowner needs two numbers:
The payoff amount, from a written payoff statement. Servicers must provide one within 7 business days of a written request.
A realistic sale price, based on recent comparable sales, not a website estimate. A free home valuation provides this.
Why you need cash at closing even with some equity?
Selling costs usually run about 8% of the sale price in Greater Houston, so a seller with less than about 8% equity may still owe money at closing. Those costs typically include negotiable real estate commissions, the owner's title policy, escrow fees, and buyer concessions.
What does the math look like for an underwater home in Katy, TX?
On a Katy, TX home that sells for $355,000 with a $385,000 payoff, the seller faces a shortfall of about $58,400 after selling costs.
How does a short sale work in Texas?
A short sale is a sale where the lender agrees, in writing, to accept less than the full mortgage payoff and release its lien so the home can close. The homeowner still lists and sells the home, but the lender must approve the price and terms.
A typical short sale follows these steps:
List the home at a realistic market price.
Submit a short sale package to the lender: a hardship letter, income documents, bank statements, tax returns, and the signed purchase contract.
Wait for the lender's review, which usually includes an appraisal or broker price opinion. Approvals often take 30 to 120 days.
Negotiate with every lienholder. A second mortgage or HELOC lender must also agree.
Close with the written approval letter and the agreed release of liens.
Do you still owe money after a short sale?
Whether a homeowner still owes money after a short sale depends on the lender's approval letter. Some lenders forgive the remaining balance in full, while others require a cash contribution or a promissory note. The approval letter should clearly state whether the lender waives the deficiency.
What are your options besides a short sale?
Homeowners who owe more than the home is worth can also pay the shortfall, rent the home out, modify the loan, offer an assumable loan, or give the lender a deed in lieu of foreclosure. Each option fits a different financial situation.
Can an assumable loan help you sell an underwater home?
An assumable FHA or VA loan can make an underwater home easier to sell at full market price, because a buyer can take over the seller's lower interest rate with lender approval. Many Katy, TX homeowners who financed in 2020 or 2021 have rates far below what buyers can get in November 2026. A lower rate can make a buyer willing to pay the top of the market, which shrinks the shortfall.
How does a short sale affect your credit and future mortgage?
A short sale generally leads to a shorter wait for a new mortgage than a foreclosure, which is one of the main reasons underwater homeowners choose it. Waiting periods depend on the loan program.
Do you pay taxes on forgiven debt from a short sale?
Forgiven debt from a 2026 short sale may be taxable, because the federal exclusion for qualified principal residence debt expired on December 31, 2025. Lenders report forgiven debt of $600 or more on IRS Form 1099-C.
Some homeowners may still avoid the tax:
Insolvency: debt forgiven while total debts exceed total assets may be excluded up to the amount of insolvency.
Bankruptcy: debt discharged in a bankruptcy case is generally excluded.
Earlier written agreements: debt forgiven in 2026 under a written arrangement made before January 1, 2026 may still qualify for the old exclusion.
A CPA should review any short sale before the homeowner signs the lender's approval.
Why are some Greater Houston homeowners underwater in 2026?
Some Greater Houston homeowners are underwater in 2026 because they bought near the 2022 price peak with small down payments, and resale values in some areas have since flattened. HAR reported a September 2026 median single-family price of $325,000, essentially flat from a year earlier, with 40,192 active listings, up 6.3%.
Homeowners in newer master-planned communities such as Elyson, Cane Island, Candela, and Bridgeland compete directly with builder inventory. When builders offer rate buydowns and closing-cost incentives on new homes, resale homes nearby often have to price lower to compete.
Homeowners who bought earlier in established communities like Cinco Ranch, Cross Creek Ranch, or Harvest Green are more likely to have positive equity. Every home is different, which is why a written valuation and payoff statement come before any decision.
Why work with Mohebbi Realty Group on an underwater sale?
Mohebbi Realty Group, led by Bobby Mohebbi of Keller Williams Signature in Katy, TX, holds the Short Sales & Foreclosure Resource (SFR) and Pricing Strategy Advisor (PSA) certifications. Bobby Mohebbi ranks in the top 1.5% of agents nationwide per RealTrends. Our relationships with more than 40 Houston-area builders give us current insight into the new-construction pricing that resale homes compete against. Our team prepares short sale packages, negotiates with every lienholder, and builds a written net sheet before a homeowner chooses a path.
FAQ
Can you sell a house with negative equity without a short sale?
Yes, a homeowner can sell a house with negative equity without a short sale by paying the shortfall at closing. The seller brings funds to the title company to cover the difference between the net sale proceeds and the mortgage payoff. The loan is then paid in full, so no short sale appears on the seller's credit report.
Does a short sale hurt your credit as much as a foreclosure?
A short sale generally causes less long-term damage to mortgage eligibility than a foreclosure. Fannie Mae and Freddie Mac usually require a 4-year wait for a new conventional mortgage after a short sale, compared with 7 years after a foreclosure. Both events still lower credit scores, and the exact impact depends on the homeowner's payment history.
Do you still owe money after a short sale in Texas?
A homeowner may or may not owe money after a Texas short sale, depending on what the lender's written approval says. Some approval letters forgive the full remaining balance, and others require a cash payment or promissory note. Homeowners should confirm the deficiency terms in writing before closing.
How long does a short sale take in Texas?
A short sale in Texas often takes 30 to 120 days for lender approval after the complete package is submitted. Homes with a second mortgage or HELOC usually take longer, because every lienholder must agree. A normal closing typically follows within about 30 days of approval.
Can you rent out your house instead of selling if you're underwater?
Yes, an underwater homeowner can rent the house out instead of selling if the rent will cover the mortgage, taxes, insurance, and repairs. Homeowners should check their loan documents for owner-occupancy requirements and switch to a landlord insurance policy. Renting delays the decision but does not remove the negative equity.
Owe more than your home is worth?
Call or text Mohebbi Realty Group at (832) 455-3565. We'll compare a full-payoff sale and a short sale for your home, confidentially and at no cost.
Request a free home valuation, estimate your numbers with the net proceeds calculator, visit our foreclosure services page, or see how we get homes sold across Katy, TX and Greater Houston.
About the author Bobby Mohebbi leads Mohebbi Realty Group at Keller Williams Signature, 920 S Fry Rd, Katy, TX 77450. Credentials: Accredited Buyer Representative (ABR), Pricing Strategy Advisor (PSA), Veterans Affairs Certified Agent (VACA), Short Sales & Foreclosure Resource (SFR), Top 1.5% of agents nationwide per RealTrends, Keller Williams Signature Top Producer, and Agent Leadership Council member. Phone: (832) 455-3565 · Bobby@mohebbirealtygroup.com Published November 4, 2026Mohebbi Realty Group and Keller Williams Signature are committed to the Fair Housing Act and equal housing opportunity. We serve every client without regard to race, color, religion, sex, disability, familial status, or national origin.