When your mortgage balance is higher than what your home can sell for, the situation can feel overwhelming. Many Washington homeowners find themselves weighing two difficult options: renting out the property (often at a loss), or pursuing a short sale. Each path has pros, cons, and long-term tax implications, and the right answer depends heavily on your finances, your future plans, and your tolerance for risk and paperwork.
Below is a straightforward breakdown to help you evaluate your options—and to highlight what Washington homeowners should consider before making a decision.
1. What Exactly Is A Short Sale and Is It Worth It?
A short sale happens when your lender agrees to let you sell the property for less than the remaining mortgage balance. While it can offer a clean break, it’s not a simple or fast process.
Pros of a Short Sale
- Avoid foreclosure (less damage to your credit than a foreclosure or bankruptcy).
- Potential debt forgiveness if the lender waives the deficiency (not guaranteed).
- Finally walk away from an underwater home you can’t afford to keep.
Cons of a Short Sale
- Lengthy approval process. Expect weeks—or months—of bank reviews, document requests, and follow-ups.
- Lender can still pursue the deficiency. In Washington, deficiency judgments after a short sale depend on the specific loan type and whether your lender waives the remaining balance in writing.
- Credit score impact. Less severe than foreclosure, but still significant.
- Possible tax implications. If the forgiven debt is treated as taxable income, you may owe tax unless you qualify for insolvency or an exclusion.
Is the paperwork really that bad?
Short sales require full financial disclosures, hardship letters, income proof, and repeated negotiations. It’s not a “sign and done” situation. Homeowners often underestimate the complexity, so if you’re considering this route, be prepared for administrative friction.
2. Should You Rent It Out Instead?
Renting can sometimes bridge a difficult financial season—but many homeowners underestimate the hidden costs.
The Upside of Renting
- Keeps the home as an asset so you can sell later when the market improves.
- Rent can offset part (or all) of your payment.
- Rental losses may be deductible (subject to passive activity rules).
- You maintain credit stability since you’re continuing to pay the mortgage.
The Downside
- You may still lose money each month. Even a small negative cash flow adds up quickly over a year.
- Wear and tear + repairs. Vacancies, tenant turnover, and maintenance can eat significantly into your budget.
- Becoming a landlord is a job. Especially true if you self-manage.
- Depreciation recapture tax later. When you eventually sell, depreciation you’ve taken (or should have taken) can increase your tax bill.
When renting makes more sense
- You expect property values to rebound within a few years.
- You can comfortably absorb a monthly loss.
- You’re open to being a landlord or can outsource property management.
- You want to delay selling for tax reasons (e.g., conversion back to primary residence).
3. Washington State–Specific Considerations
While Washington doesn’t have a state income tax, it does have unique rules worth noting:
Mortgage Types Matter
- Washington is primarily a non-recourse state only for certain foreclosure situations—not automatically for short sales.
- Always verify whether your lender plans to waive deficiency. This determines whether you walk away clean or still owe money after closing.
Strong Tenant Protections
- If you rent, expect detailed rules around security deposits, notice periods, and habitability.
- Some cities (Seattle, Tacoma, Burien) have additional local landlord regulations.
Market Conditions
- In many Washington regions, rents are rising, but home prices may still be plateauing.
- Negative cash flow may tighten, loosen, or flip depending on your local rental market.
4. Other Options You Might Be Missing
Before deciding between renting and a short sale, consider these alternatives:
- Loan Modification
Lenders sometimes reduce monthly payments through:- Lower interest rates
- Extended loan terms
- Principal forbearance
Not guaranteed, but worth exploring.
- Forbearance or Repayment Plan
Temporary relief if your hardship is short-term. - Sell With Cash to Cover the Difference
If the deficiency is small and you can afford it, this avoids the credit impact of a short sale. - Rent-to-Own or Lease Option
If your market supports it, this attracts long-term tenants who may eventually purchase the home. - Wait and Reassess
If you are not in immediate financial crisis, holding the home longer may improve your position — especially in appreciating Washington markets.
Should You Walk Away, Rent It, or Short Sell?
Short Sale Might Make Sense If:
- You’re underwater with no realistic path to break even.
- You cannot cover monthly losses.
- You’re ready for a clean break and okay with the credit hit.
Renting Might Make Sense If:
- You believe the home will recover value soon.
- You can comfortably manage the monthly shortfall.
- You want to preserve the asset or convert it back to a primary residence later.
Other options might make sense if:
- Your hardship is temporary.
- You qualify for assistance or modification.
- The deficiency in a normal sale is small enough to cover.
Final Thoughts
Choosing between a short sale and renting out your home is stressful, and Washington’s unique housing landscape adds complexity. The right decision depends on your financial stability, your risk tolerance, and your long-term goals.
If you’re facing this decision, consider speaking with:
- A tax professional (for tax implications of short sales, debt forgiveness, and rental losses)
- A real estate attorney (for deficiency and liability issues)
- A local real estate agent (for market-specific rental and sale projections)
The more clarity you gather, the easier it becomes to choose the path that aligns with your financial future.