Underwater on Your Mortgage in NoVA or Maryland: Sell, Rent, or Short Sale?

Most articles about this are written by someone selling you the answer. Short sale specialists recommend short sales. Property managers recommend renting. Investors recommend creative financing. Funny how everyone seems to arrive at the answer that benefits them.

Here's how I'd think through it if it were my own house.

First, don't panic. Being underwater doesn't automatically mean you've made a bad financial decision. Sometimes it's simply the result of buying recently, getting PCS orders, a divorce, or buying in a market that hasn't had enough time to appreciate.

How you got here

You didn't hold the home long enough. Buying a home is expensive. So is selling one. Between closing costs, commissions, and the fact that early mortgage payments go primarily to interest, most homeowners need several years for appreciation and principal paydown to catch up. That's why I generally tell clients to buy only if they expect to stay at least five years.

You bought new construction. Builders sell a lifestyle, incentives, and brand-new everything. The resale market doesn't pay extra for any of that. If the builder is still selling, they're effectively competing against you — and setting your price ceiling. Builders also offer incentives — rate buydowns, closing cost assistance, upgrades — that don't show up in comparable sales. Buyers compare your resale against a brand-new home with incentives.

You bought with little or nothing down. VA at 0%, FHA at 3.5%. With very little equity to start, even a flat market can leave you owing more than you'd net after selling costs.

Selling costs are bigger than you think. Commissions, transfer and recordation taxes, and settlement fees run 6–8% of the sale price. On a $600,000 home that's $30,000 to $45,000 that has to come from equity you may not have. For a full line-by-line breakdown of what actually gets charged at the table, see Closing Costs Explained in Virginia.

And if you're thinking you'll skip the commission by selling it yourself — most buyers come with an agent, and that agent's compensation typically gets negotiated as part of the purchase agreement, often through a seller concession. It's not automatic and it's not required, but plan on 2–2.5% landing on your side more often than not in the real world. Selling FSBO saves you the listing side, not the whole thing.

Option 1: Sell and bring cash

The simplest option. No credit impact. No ongoing obligation.

Works if you have the cash and want a clean break — especially after a divorce, PCS move, or major life change. If you can't bring cash to closing, this option usually isn't available.

Before anything else, get a real net sheet. Not a Zestimate minus your loan balance. Actual payoff with per-diem interest, commissions, Maryland or Virginia transfer and recordation taxes, settlement fees, and prorations. That number determines whether this option exists for you. I've seen homeowners think they're $5,000 underwater and discover they're actually $35,000 underwater — or vice versa. Guessing isn't a strategy.

If the gap is small, pricing strategy can close it. How a home is priced in the first two weeks drives net proceeds more than almost anything else — see Market Psychology: How Smart Pricing Sells Homes for More.

Option 2: Rent it

Full monthly obligation — principal, interest, taxes, insurance, HOA — minus realistic market rent. That gap is what you pay every month. Subtract another 8–10% if you use a property manager, and set aside another 5% for vacancy and repairs.

A home costing $4,000 a month that rents for $3,500 runs you $500 a month before anything breaks. Call it $6,000–$8,000 a year out of pocket.

You're buying time — principal gets paid down, values may recover. Sometimes that's a smart investment. Sometimes it's throwing good money after bad. But you become a landlord, your capital gains exclusion lapses if you rent too long (you must live in the home for 2 out of the last 5 years for exclusion), and if you're divorcing, you stay financially entangled with your ex for years. Markets don't always recover on your timeline. I've also seen people rent for three years waiting for values to recover, only to spend far more subsidizing the property than they would have lost by selling.

Option 3: Short sale — including on a VA loan

A short sale is usually the option when selling normally isn't possible because you can't bring enough cash to closing. The lender accepts less than the full payoff and releases the lien so the sale can close.

You document hardship — divorce, job loss, medical, relocation, income drop — and provide financial documentation (bank statements, income statements, and similar). Then the lender decides. Any offer is contingent on their approval, which takes months. Two to six from listing to closing isn't unusual. Some buyers walk during that window.

VA loans work differently than conventional loans here.

If the VA pays a claim to your lender as part of an approved short sale (also called a compromise sale), that amount generally remains charged against your VA entitlement until it's repaid or otherwise restored under VA rules. If approved, the short sale allows the transaction to close without you bringing the full shortfall to closing.

That doesn't necessarily mean you lose your VA loan benefit. Many veterans still have enough remaining entitlement to buy another home with no down payment, and restoration is available under VA rules, although the requirements depend on your circumstances.

Two things worth knowing:

• A VA short sale is generally considered after your servicer evaluates other foreclosure-avoidance options. If another solution — such as a repayment plan, forbearance, or loan modification — can reasonably keep you in the home, the servicer will generally evaluate those options first.
• The VA itself doesn't impose a mandatory waiting period after a short sale. If you hear about a two-year wait, that's generally a lender overlay — not a VA rule. Some lenders may allow a shorter timeline, particularly with documented extenuating circumstances.

Get the specifics from your servicer and your VA Regional Loan Center. Terms vary and this is not a place to rely on general information.

A short sale often has a significant credit impact, but it's generally viewed more favorably than a completed foreclosure. Credit can be recovered over time.

On non-VA loans, some lenders may pursue a deficiency judgment for the unpaid balance. If you're considering a short sale, make sure any deficiency is expressly released in writing. That's a conversation for your attorney.

If your loan carries a below-market rate, it's also worth checking whether a buyer could take it over rather than you selling short. Read VA Loan Assumptions in Northern Virginia and Maryland: What Nobody Tells You before you assume that's an easy path — the equity gap is usually the deciding factor.

Option 4: Call your servicer

This should be your first phone call if you are behind on payments or about to be — not your last resort.

If your hardship is temporary, modification or forbearance may buy you time without selling at all. VA, FHA, and conventional all have different programs, and VA loans have unique loss mitigation options that are worth asking about specifically.

One phone call. Most people skip it assuming the answer is no.

Option 5: Subject-to — know what it is

You'll encounter this, because investors target sellers in your position.

The buyer takes title. The mortgage stays in your name. They agree to make the payments. The loan isn't assumed, refinanced, or paid off — it's still legally yours.

If they stop paying, it's your default, your foreclosure, your credit. Nearly every mortgage has a due-on-sale clause letting the lender demand full repayment when title transfers; lenders don't always exercise it, but they can. And the debt stays on your credit, affecting your ability to qualify for anything else.

Subject-to isn't inherently bad. It can solve real problems when the buyer is experienced, well-capitalized, and performs as promised. The issue isn't the structure — it's that your liability doesn't end when ownership does.

If you're seriously considering it, have a real estate attorney review it first. Yours, not theirs.

How to decide

• Can you bring cash to closing? If yes and you want to be done, sell.
• If not, can you carry the monthly shortfall? If yes and your timeline is flexible, rent it.
• If neither — what matters more, your credit or being free of the property? If it's credit, keep looking at ways to hold. If it's getting out from under the property, a short sale is the honest answer.

None of these options are ideal. They're simply different ways to solve the same problem. The right answer depends on your cash, timeline, risk tolerance, and whether your priority is protecting your credit or moving on with your life.

General information, not legal, tax, or financial advice. Short sales, VA short sales, entitlement restoration, deficiency, tax treatment, and credit consequences vary by loan type, lender, and jurisdiction. Consult an attorney, CPA, and a VA-experienced lender about your situation.