Mortgage delinquencies are on the rise in nearly half of U.S. states due to rising costs of homeownership, and many people—especially those who bought when interest rates were high or have recently faced job loss or rising expenses—are finding themselves in a tough financial spot.
While foreclosure can seem like the end of the road, there’s another option that’s often overlooked: the “equity exit.” Originally a strategy used by real estate investors, it’s now being used by everyday homeowners to sell their home and take back control before things spiral.
An equity exit won’t erase the hardship—but it can help you avoid serious credit damage, preserve some financial footing, and give you a chance to move forward on your terms before the worst happens.
What is the ‘equity exit’ strategy—and why has it mostly been used by investors?
The equity exit strategy involves selling a home before the bank forecloses, allowing you to access any remaining equity, pay off your mortgage, and avoid the credit-damaging consequences of foreclosure.
Unlike a short sale, where the lender agrees to accept less than what you owe on your mortgage balance, the equity exit strategy focuses on selling while there’s still time and value left in the house.
Historically, this strategy has been more commonly employed by investors in distressed markets rather than traditional homeowners since investors are often more attuned to market conditions and can act quickly to mitigate their financial losses. They recognize that, in a declining market, time is of the essence.
By selling before foreclosure, they can recoup some of their investment and prevent a total loss, which is especially critical when the property’s value is dropping and other costs (like taxes and maintenance) might outweigh any potential profits.
As awareness grows about the potential benefits of selling before foreclosure, more homeowners are beginning to consider the equity exit as a viable option. It can empower them to take control of their financial situations, much like investors have done for years.
How an equity exit can help homeowners reclaim control
If you owe more on your mortgage than your home is worth, it might be a smart option and often the least damaging path forward. But while these benefits can be valuable, remember that this is still a loss in some respects as you’re parting with your home.
Avoid the long-term credit damage
One of the biggest advantages of selling before foreclosure is protecting your credit. A foreclosure can stay on your credit report for up to seven years, making it harder to qualify for future loans, credit cards, or even rental housing.
Walk away with some equity or cash
By acting quickly, you might still be able to recoup some of your home’s equity or at least walk away with a bit of cash, which could provide a financial cushion as you transition to a new living situation. The proceeds from the sale might even cover relocation costs or a rental deposit for a new place.
Stay in control of the timeline
Selling your home allows you to be in charge of the timeline. Instead of being forced into a rushed move during foreclosure, you can plan and make thoughtful decisions about your next steps.
Homeowners typically have several months before foreclosure proceedings take hold, but the exact timeline can vary by state and lender. That’s why it’s so important to reach out early to a real estate agent, investor, or financial adviser as soon as you realize you might have to sell.
The hard truth: You’ll still lose your home—but you can rebuild
An equity exit is not a silver bullet. Selling under financial pressure can sometimes mean accepting less-than-ideal offers, and ultimately, you won’t get to keep your home. Afterward, you might have to downsize or rent for a while as you get back on your feet as well.
But even in a difficult moment, this choice can open the door to something better than foreclosure. Perhaps the biggest benefit of an equity exit is that it gives you—and not the bank—the power to decide what comes next.
After a sale, your focus can shift to rebuilding. That might mean repairing credit with consistent on-time payments, working with a HUD-approved housing counselor, or applying for rental assistance programs designed to help those who are transitioning out of homeownership. Local housing authorities and financial coaching services can provide guidance, rental support, and help for creating a realistic path forward.
It’s not the only option
Equity exit is one strategy—but it’s not the right fit for everyone. There are many other foreclosure alternatives, like a loan modification or short sale. A loan modification can adjust your interest rate or extend your loan term to make payments more manageable. A short sale, while still a sale at a loss, might be a better financial move depending on your lender’s terms.
Talking to a trusted adviser can help you weigh all your options and choose the one that’s right for your situation.
Source: realtor.com ~ By: Elissa Suh ~ Image: Canva Pro