Owe More Than Your Home Is Worth in Katy, TX? 6 Options
Owing more than a home is worth, called negative equity, leaves six main options in Texas: stay and pay down, rent the property, bring cash to closing, request a short sale, negotiate a deed in lieu, or allow foreclosure. Mohebbi Realty Group helps Katy, TX homeowners compare these against current market value.
TL;DR
Negative equity means the mortgage balance exceeds the home's current market value, and it carries no legal consequence by itself until the homeowner needs to sell, refinance, or stops paying.
Cotality reported 1.09 million U.S. homes in negative equity as of Q1 2026, about 1.9% of all mortgaged properties, against a 26% peak in Q4 2009.
Houston was among the metropolitan areas with the largest increases in negative equity share in Cotality's Q4 2025 report, alongside Denver, Los Angeles, and Las Vegas.
The Greater Houston median single-family price fell 1.5% year over year to $330,000 in August 2026, per the Houston Association of REALTORS® — a $5,000 decline that moved some recent buyers underwater.
The federal tax exclusion for forgiven mortgage debt on a principal residence expired December 31, 2025. Per IRS Instructions for Form 982, qualified principal residence indebtedness can be excluded only for discharges before January 1, 2026, or under a written arrangement entered into before that date.
Texas home equity loans under Article XVI, Section 50(a)(6)(C) of the Texas Constitution generally cannot produce a personal deficiency judgment, while purchase-money mortgages can, subject to a two-year deadline under Texas Property Code § 51.003.
Key Takeaways
Get a current market value before choosing anything. Four of the six options only make sense once the actual gap between the balance and the value is a real number instead of an estimate.
Talk to a CPA before accepting any debt forgiveness in 2026. The exclusion that protected homeowners through 2025 has lapsed, and the insolvency exclusion that may replace it is calculated, not automatic.
Find out whether the loan is purchase-money or a home equity loan. In Texas that single distinction changes whether a lender can pursue a shortfall personally.
What does it mean to be underwater on a mortgage?
Being underwater means the balance owed on the mortgage is higher than what the home would sell for today. The industry terms are negative equity and upside down, and they describe the same condition.
The arithmetic is simple. A homeowner who owes $355,000 on a house currently worth $330,000 is underwater by $25,000. That $25,000 is the gap that has to be closed by cash, by time, by the lender agreeing to accept less, or by the home changing hands through foreclosure.
Negative equity is not a default, a lien, or a legal status. A homeowner who is underwater and current on payments is in no trouble at all and may stay that way indefinitely. The condition only becomes a decision point at the moment the homeowner needs to sell, needs to refinance, or can no longer make the payment.
What causes negative equity?
Buying near a local price peak and then selling into a softer market before principal has built up
A low down payment, which leaves little cushion. Cotality noted a particular increase in the share of homeowners carrying 85% to 94% loan-to-value ratios.
Falling local prices, which is the current pressure in Greater Houston
Second liens or home equity borrowing stacked on top of the first mortgage
Rolled-in costs from a refinance that increased the balance
Closing costs on a sale, which routinely add 7% to 9% of the sale price and can make a homeowner with thin positive equity effectively underwater at the closing table
How common is negative equity in Houston right now?
Negative equity remains historically rare nationally, but Houston is one of the markets where it has grown fastest. Cotality's Homeowner Equity Report for Q1 2026 counted approximately 1.09 million U.S. homes in a negative equity position, about 1.9% of all mortgaged properties. For scale, negative equity peaked at 26% of mortgaged residential properties in Q4 2009.
The local picture is where it matters. In Cotality's Q4 2025 report, Houston was named among the large metropolitan areas with the largest increases in negative equity share, along with Denver, Los Angeles, and Las Vegas. That is a change in direction from the prior several years.
A median price that is down 1.5% year over year, and down 2.9% for existing homes, is the specific condition that puts recent buyers underwater. A homeowner who purchased in 2024 with a 3.5% down payment and has paid down very little principal can be below water after two years of flat-to-declining prices and the cost of selling.
What are the six options for a Texas homeowner who owes more than the home is worth?
There are six, and they differ far more in consequence than most summaries suggest. The right one depends on whether the homeowner can afford the payment, how long they can stay, and what the actual gap is.
Stay and pay down
Rent it out
Bring cash to closing
Short sale
Deed in lieu of foreclosure
Foreclosure
A seventh path exists and is worth naming: loan modification or forbearance through the servicer's loss mitigation department, which changes the payment rather than the ownership. That is a conversation between the homeowner and the servicer, and Mohebbi Realty Group does not perform loan modification services.
What should a homeowner do first?
Get the exact payoff. Request a written payoff statement from the servicer, not the balance shown on a monthly statement. They are different numbers.
Get a current market value. Start with the home valuation tool, then confirm with closed comparable sales in the subdivision from the last 90 days.
Run the real net. The net proceeds calculator applies commissions, title, prorated taxes, and payoff so the gap is a specific dollar figure.
Identify the loan type. Purchase-money mortgage, refinance, or Texas home equity loan under Section 50(a)(6). This determines deficiency exposure.
Book a CPA consultation before agreeing to anything that forgives debt.
Is forgiven mortgage debt taxable in 2026?
Generally yes, and this changed recently. The federal exclusion that let homeowners leave forgiven mortgage debt off their taxable income expired at the end of 2025.
Per the IRS Instructions for Form 982, qualified principal residence indebtedness can be excluded from income for discharges before January 1, 2026, or discharges subject to an arrangement entered into and evidenced in writing before January 1, 2026. The maximum had been $750,000, or $375,000 for married filing separately.
For a Katy, TX homeowner considering a short sale in late 2026, the practical reading is this: unless a written arrangement with the lender was already in place before January 1, 2026, that specific exclusion is unavailable.
That does not automatically mean a tax bill. Section 108 of the Internal Revenue Code contains other exclusions that remain in force, and one of them is frequently the relevant one:
Insolvency. If total liabilities exceeded the fair market value of total assets immediately before the discharge, forgiven debt may be excluded up to the amount of the insolvency. This requires a calculation and documentation.
Bankruptcy. Debt discharged in a Title 11 case is excluded.
Non-recourse debt. Where the lender's only remedy is the property itself, the transaction generally produces no cancellation-of-debt income at all, because the full balance is treated as the amount realized on the disposition.
Each of these is fact-specific and requires a CPA or tax attorney. Mohebbi Realty Group does not provide tax advice, and nothing here should be treated as a determination of any homeowner's tax liability. Speak with a CPA before signing a short sale approval letter or a deed in lieu agreement. The cost of that consultation is small relative to the number at stake.
Can a lender come after a Texas homeowner for the shortfall?
It depends on the type of loan, and Texas draws a sharper line here than most states.
Purchase-money and refinance mortgages. Texas permits deficiency judgments. Under Texas Property Code § 51.003, a lender seeking a deficiency after a non-judicial foreclosure sale must file suit within two years of the foreclosure sale. The statute also gives the borrower the right to request a fair-market-value offset: if the property's actual fair market value was higher than the foreclosure sale price, the court may reduce the deficiency accordingly.
Texas home equity loans. Under Article XVI, Section 50(a)(6)(C) of the Texas Constitution, a home equity loan is generally non-recourse — the lender's remedy is the property, and no personal deficiency judgment is available absent actual fraud. Home equity loans and HELOCs also require a court order before foreclosure, which is a different and typically longer process than the standard non-judicial track.
Short sales and deeds in lieu are negotiated, not automatic. Whether a lender releases the homeowner from the shortfall depends on the written terms of the approval letter. A short sale approval that says the lender reserves its rights to the deficiency is a very different document from one granting a full release. That language is the entire point of having a Texas real estate attorney review it before signing.
Nothing in this section is legal advice, and loan documents vary. A licensed Texas real estate attorney should review the actual note and deed of trust.
How does the Texas foreclosure timeline actually work?
Texas uses non-judicial foreclosure for most residential mortgages under Texas Property Code § 51.002, which means no court hearing is required and the process moves faster than in most states.
The general sequence:
Federal pre-foreclosure period. Mortgage servicers generally must wait until a loan is more than 120 days delinquent before making the first notice or filing for foreclosure.
Notice of default and intent to accelerate. The servicer sends written notice with a 20-day period to cure the default (Texas Property Code § 51.002(d)).
Notice of sale. If the default is not cured, the servicer mails notice of the foreclosure sale at least 21 days before the auction, and also posts and files it. The 21 days run from the mailing date, not from receipt (§ 51.002(b)).
The auction. Foreclosure sales occur on the first Tuesday of the month at the county courthouse, within a set time window.
After the sale. Texas provides no right of redemption following an ordinary deed-of-trust foreclosure sale. The purchaser must give a notice to vacate before filing an eviction.
Two things follow from that timeline. First, the window between the first formal notice and the auction can be short — which is why a homeowner who wants to sell should start months before, not weeks. Second, home equity loan foreclosures require a court order first, which adds time.
Why the calendar matters for a short sale
A short sale needs a buyer, a lender approval, and a closing. Lender loss mitigation review commonly takes weeks after a contract is submitted, and approval is never guaranteed. Starting that process after a notice of sale has been posted leaves very little room.
How does a short sale work in Katy, TX and Greater Houston?
A short sale is a sale in which the lender agrees to accept less than the full payoff and release the lien so the transaction can close. The homeowner sells the home the lender absorbs the shortfall or pursues it separately depending on the written terms.
The general sequence:
The homeowner contacts the servicer's loss mitigation department and requests short sale consideration.
The homeowner assembles a hardship package — typically a hardship letter, income documentation, bank statements, and a financial worksheet.
The property is listed at a price supported by current comparable sales. In the Houston MLS the listing must be disclosed as subject to lender approval.
An offer is received and submitted to the servicer with the package.
The servicer orders a valuation — a broker price opinion or an appraisal.
The servicer issues a written decision. An approval letter states the net proceeds required and, critically, whether the deficiency is released.
The transaction closes, or the terms are renegotiated, or the request is declined.
Two things a seller should know going in. No agent can guarantee that a lender will approve a short sale, and anyone who promises otherwise is making a claim they cannot support. And a short sale is not faster than a conventional sale, the lender review adds time on top of the ordinary marketing and closing period.
Mohebbi Realty Group's role is the real estate side: pricing the property against current comparable sales, marketing it, managing the buyer and the contract, and keeping the documentation moving. The homeowner's attorney reviews the approval terms, and the homeowner's CPA addresses the tax consequences. Our foreclosure and distressed property services page explains how that division of work operates.
What does negative equity look like across Katy, Fulshear, Cypress, and Richmond?
Exposure varies sharply by community and by purchase year, because the communities that delivered the most new construction in 2022 through 2024 now have the most resale competition from builders.
Cane Island and Elyson, Katy, TX — Active builder inventory sits inside the same community. A 2023 buyer competes against a builder offering current incentives on a comparable new home, which pressures resale values directly. This is the most common negative-equity profile we see locally.
Cross Creek Ranch, Fulshear, TX — Wide price spread between sections. Section-level comparable selection matters more here than community-level averages, and a community-wide estimate can easily misstate a specific home's value by tens of thousands of dollars.
Bridgeland, Cypress, TX — Ongoing new-section releases mean resale sellers price against both closed resales and current builder base pricing.
Harvest Green and Aliana, Richmond, TX — MUD district tax rates affect buyer affordability and therefore what a buyer will pay, which feeds back into value.
Because we track incentives across 40+ builders in Greater Houston, we can tell a homeowner what the new-construction competition in their own subdivision is actually offering this month — which is often the number that determines the resale value. Community detail is available across our Katy and Greater Houston area guides.
Why Mohebbi Realty Group
Mohebbi Realty Group is a real estate team led by Bobby Mohebbi at Keller Williams Signature in Katy, TX, serving Katy, Fulshear, Cypress, Richmond, Sugar Land, and Greater Houston. Bobby Mohebbi holds the Short Sales & Foreclosure Resource (SFR) designation, which is the National Association of REALTORS® certification specific to distressed property transactions, along with Pricing Strategy Advisor (PSA), Accredited Buyer Representative (ABR), and Veterans Affairs Certified Agent (VACA). He ranks in the top 1.5% of agents nationwide per RealTrends.
We handle the real estate: an accurate current valuation, the listing, the buyer, the contract, and the documentation the servicer requires. We work alongside the homeowner's attorney and CPA rather than in place of them. We do not provide legal or tax advice, do not perform loan modification services, and do not charge homeowners advance fees for distressed property assistance.
Frequently Asked Questions
Does being underwater on a mortgage mean a homeowner is in default? No. Negative equity and default are unrelated. A homeowner who owes more than the home is worth and continues making payments on time is not in default and faces no lender action. The condition only forces a decision when the homeowner needs to sell, needs to refinance, or cannot make the payment.
Can a homeowner sell a house for less than the mortgage balance in Texas? Yes, through either of two routes. The homeowner can bring the difference to closing in cash, which requires no lender permission, or request a short sale, in which the lender agrees to accept less than the full payoff and release the lien. A short sale requires lender approval and no outcome can be guaranteed.
Is forgiven mortgage debt taxable income in 2026? Generally yes for new discharges. Per IRS Instructions for Form 982, the qualified principal residence indebtedness exclusion applies only to discharges before January 1, 2026, or to discharges under a written arrangement entered into before that date. Other exclusions under Section 108, including insolvency and bankruptcy, may still apply. A CPA should evaluate any specific situation.
How long does foreclosure take in Texas once it starts? Texas uses non-judicial foreclosure under Texas Property Code § 51.002. Servicers generally must wait until a loan is more than 120 days delinquent before the first notice. After that, the homeowner receives a notice of default with a 20-day cure period, followed by a notice of sale at least 21 days before the auction, which is held on the first Tuesday of the month. Home equity loan foreclosures require a court order first.
Is it better to do a short sale or let the home go to foreclosure? The answer is specific to the loan type, the homeowner's finances, and the written terms offered. A short sale generally gives the homeowner more control over timing and the opportunity to negotiate deficiency language in writing, while foreclosure follows a statutory schedule the homeowner does not control. Because the consequences are legal, tax, and credit-related, this comparison should be made with a Texas real estate attorney and a CPA rather than from general guidance.
Start With the Actual Number
Most of this decision gets easier once the gap stops being a guess. Call or text (832) 455-3565 and we will pull the closed comparable sales in the subdivision and give a straight read on what the home would realistically sell for today.
If the situation involves missed payments or a notice from the servicer, start at our foreclosure and distressed property services page, and contact a Texas real estate attorney promptly — the Texas timeline moves quickly once it begins. Other common questions are answered at our FAQ page.
About the Author
Bobby Mohebbi — Mohebbi Realty Group, Keller Williams Signature, 920 S Fry Rd, Katy, TX 77450. Short Sales & Foreclosure Resource (SFR), Pricing Strategy Advisor (PSA), Accredited Buyer Representative (ABR), Veterans Affairs Certified Agent (VA). RealTrends top 1.5% of agents nationwide. Keller Williams Signature Top Producer and Agent Leadership Council member. Serving Katy, Fulshear, Cypress, Richmond, Sugar Land, and Greater Houston.
Call or text (832) 455-3565 · Bobby@mohebbirealtygroup.com · https://www.mohebbirealtygroup.com
Published October 16, 2026. Last updated October 16, 2026.
Bobby Mohebbi is a licensed Texas real estate sales agent sponsored by Keller Williams Signature, a licensed Texas real estate broker. Mohebbi Realty Group is a team operating under Keller Williams Signature. This article is general information about Texas real estate practice and is not legal, tax, financial, or credit advice. Consult a licensed Texas real estate attorney regarding loan documents, deficiency terms, and foreclosure, and a CPA or tax attorney regarding cancellation-of-debt income. No outcome of any short sale, deed in lieu, or lender negotiation is guaranteed, and lender approval is at the lender's sole discretion. Mohebbi Realty Group does not provide loan modification services and does not charge advance fees for distressed property assistance. Market data reflects August 2026 HAR figures and Q1 2026 Cotality figures and changes regularly. Tax law described reflects IRS guidance as of October 2026. Equal Housing Opportunity. TREC Information About Brokerage Services · TREC Consumer Protection Notice.