Sell a House With an Underwater Mortgage in Hawaiʻi — Negative Equity Options

Yes — you can sell a house in Hawaiʻi even if you owe more than it is worth. When your mortgage balance is higher than your home’s market value, your loan is “underwater” (also called negative equity or being “upside down”). You have several real paths forward: bring the shortfall in cash to closing, negotiate a short sale with your lender’s approval, pursue a loan modification, or sell to a cash buyer who can move fast. Our team at Hawaii Property Buyers has helped Hawaiʻi homeowners across Oʻahu, Maui, the Big Island, and Kauaʻi work through negative-equity sales without the foreclosure clock running out. Call (808) 940-3430 for an honest, no-obligation conversation about what is actually possible for your property.

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Table of Contents

1. We Understand Where You’re Standing
2. What Does “Underwater Mortgage” Mean in Hawaiʻi?
3. How Common Is Negative Equity in Hawaiʻi’s High-Price Market?
4. Your Options When You’re Underwater
5. Short Sale in Hawaiʻi Explained
6. HARPTA and Underwater Sales
7. Tax Implications of Forgiven Mortgage Debt
8. How a Cash Sale Works When You’re Underwater
9. Traditional Sale vs. Short Sale vs. Cash Buyer
10. Frequently Asked Questions
11. Get Your Cash Offer

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We Understand Where You’re Standing

Finding out that your home is worth less than what you owe on it is a deeply unsettling moment. Maybe you bought near the top of the market, took out a second mortgage or a home equity line of credit, or watched your neighborhood values soften while your loan balance barely moved. Whatever the cause, the math feels like a trap: you want or need to sell, but the numbers do not add up the way they would for a homeowner with equity.

We want you to know two things. First, you are not alone — negative equity happens to careful, hardworking people across all four islands, often through no fault of their own. Second, being underwater is a solvable situation, not a dead end. There are honest, legal paths out, and the right one depends on your specific numbers, your timeline, and whether you are also behind on payments. Our team has walked Hawaiʻi homeowners through every one of these paths. We will tell you the truth about your options, even when the truth is that a different path serves you better than selling to us.

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What Does “Underwater Mortgage” Mean in Hawaiʻi?

An underwater mortgage — also called negative equity or being “upside down” — exists when the total amount you owe on your home is greater than what the home would sell for in today’s market. For example, if your Oʻahu home would realistically sell for $650,000 but your mortgage balance (plus any second loan or HELOC) is $720,000, you are underwater by roughly $70,000.

The simple formula is:

Negative equity = Total mortgage debt − Current market value

If that number is positive, you owe more than the house is worth.

It is important to separate two issues that often get tangled together:

• Being underwater is about value — you owe more than the home is worth.
• Being behind on payments is about cash flow — you cannot make the monthly payment.

You can be underwater while perfectly current on your loan, and you can be behind on payments while still holding equity. Many homeowners face both at once, which is when the situation gets most urgent. If you are also behind on your mortgage, read our pages on selling when you’re behind on mortgage payments in Hawaiʻi and selling a house in pre-foreclosure, because timing changes which options remain open to you.

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How Common Is Negative Equity in Hawaiʻi’s High-Price Market?

Hawaiʻi has one of the highest median home prices in the United States, which cuts two ways. On one hand, long-term owners often hold substantial equity. On the other hand, the high cost of entry means recent buyers — especially those who put little money down, used adjustable-rate loans, or borrowed against their equity — can fall underwater quickly when values dip or when a second loan stacks on top of the first.

According to ATTOM’s U.S. Home Equity & Underwater Report, Hawaiʻi has historically posted one of the lowest shares of seriously underwater mortgages in the nation — typically a low single-digit percentage of mortgaged homes — precisely because long-held properties have appreciated so much. The Hawaiʻi-specific insight most homeowners miss: negative equity here is rarely caused by a market-wide crash and far more often caused by layered debt on a single property — a first mortgage plus a HELOC or second mortgage taken out when values were peaking, plus the steep transaction costs of selling. In a state where a 5-6% real estate commission on a median-priced home can exceed $40,000, a homeowner with only thin equity on paper can still end up “effectively underwater” once selling costs are subtracted. That is why running your real, all-in numbers — not just the Zillow estimate minus the loan balance — matters so much before you decide on a path.

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Your Options When You’re Underwater

You have more paths than you might think. Here is an honest look at each one.

Option 1: Bring Cash to Closing (Pay the Shortfall)

If the gap between what you owe and what the home sells for is modest, you can simply sell the home traditionally and bring the difference to closing in cash. Say you sell for $650,000, owe $670,000, and have $20,000 in savings — you can cover the shortfall and walk away free and clear.

Best for: Homeowners with a small shortfall and the cash to cover it who want a clean, simple exit and to fully protect their credit.

The challenge: This requires real cash on hand, and on top of the shortfall you still pay commissions and closing costs in a traditional sale. The gap can be larger than it first appears.

Option 2: Short Sale

Sell the home for less than the mortgage balance with your lender’s written approval to accept the reduced amount. See our full short sale section below.

Best for: Homeowners who are meaningfully underwater, cannot bring cash to closing, and are willing to accept some credit damage to avoid foreclosure.

The challenge: The lender controls the timeline and the decision. Approval can take 60-120+ days, and the lender may or may not waive its right to pursue the remaining “deficiency” balance.

Option 3: Loan Modification

Ask your lender to permanently change your loan terms — lower the interest rate, extend the term, or in rare cases reduce principal — to make the payment affordable so you can keep the home and wait for values to recover.

Best for: Homeowners who want to keep the home, have stable income, and are underwater mainly because of payment affordability rather than a need to move.

The challenge: Modifications take months to process, approval is not assured, and they do not erase the negative equity — they only make staying possible while you wait for values to rise.

Option 4: Rent It Out and Wait

If your mortgage payment is close to or below local rents, you can hold the property as a rental until values rise enough to sell with equity.

Best for: Homeowners who can afford to keep the loan, are not in a hurry to move on financially, and are comfortable being a landlord.

The challenge: You become a landlord with all the obligations under Hawaiʻi’s Residential Landlord-Tenant Code (HRS Chapter 521), plus repairs, vacancies, and management. Hawaiʻi rents do not always cover the high carrying costs on a recently purchased home.

Option 5: Deed in Lieu of Foreclosure

Voluntarily hand the deed to your lender in exchange for release from the loan. No auction, somewhat less credit damage than a full foreclosure.

Best for: Homeowners with no equity and no realistic buyer who want to exit cleanly and avoid a drawn-out foreclosure.

The challenge: You receive no cash, the lender may still pursue a deficiency in some cases, and many lenders refuse a deed in lieu when there are other liens on the property.

Option 6: Sell to a Cash Buyer — Hawaii Property Buyers

We can buy directly, close in 7-14 days, and — when a property is underwater — work alongside your lender to facilitate a short sale or structure a transaction that satisfies the loan. See how a cash sale works when you’re underwater.

Best for: Homeowners who need speed, certainty, and a team that handles the lender communication and paperwork for them.

The challenge: If you are deeply underwater, even a cash sale needs lender cooperation through a short sale. We are upfront about that — call us and we will tell you honestly what we can and cannot do.

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Short Sale in Hawaiʻi Explained

A short sale is a sale of your home for less than the outstanding mortgage balance, where the lender agrees in writing to accept the lower amount and release the lien so the sale can close. It is called “short” because the proceeds fall short of paying off the loan.

How the Hawaiʻi Short Sale Process Works

1. You list or find a buyer. A short sale still needs a real buyer and a real purchase price — we can serve as that cash buyer.
2. You submit a short-sale package to your lender. This typically includes a hardship letter, proof of income and expenses, bank statements, the purchase contract, and a broker’s price opinion or appraisal showing current value.
3. The lender reviews and approves (or counters). The lender — or, if your loan is government-backed, the investor behind it (Fannie Mae, Freddie Mac, FHA, or VA) — decides whether to accept the shortfall. This is the slow part.
4. The sale closes once the lender issues written approval, and the lien is released.

Lender Approval Is Required — and Controls the Timeline

Unlike a normal sale, you cannot close a short sale without the lender’s written approval, because the lender is agreeing to take a loss. In our experience and across industry reporting, Hawaiʻi short-sale approvals commonly take 60 to 120 days or more, depending on the servicer, the investor, and whether there is a second lienholder who also must agree.

Credit Impact of a Short Sale

A short sale is reported to the credit bureaus and typically lowers a credit score, but generally less severely than a completed foreclosure and for a shorter practical recovery period. The exact reporting depends on how the account is settled and whether the balance is marked “paid” or “settled for less than owed.”

The Deficiency Question

After a short sale, the unpaid gap is called a deficiency. Some lenders waive it as part of the approval; others reserve the right to pursue it. Getting the deficiency waiver in writing inside the lender’s approval letter is one of the most important things to confirm — ideally with a Hawaiʻi real estate attorney reviewing the documents. If you are facing foreclosure pressure at the same time, our selling a house in foreclosure in Hawaiʻi page explains how HRS Chapter 667‘s judicial foreclosure timeline often leaves room to complete a short sale before an auction.

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HARPTA and Underwater Sales

If you are a non-resident of Hawaiʻi selling Hawaiʻi real estate, you need to know about HARPTA — the Hawaii Real Property Tax Act. According to HRS §235-68, the buyer must withhold 7.25% of the gross (total) sale price at closing and remit it to the Hawaiʻi Department of Taxation as a prepayment against any state income tax the non-resident seller may owe on the gain.

Two points matter especially when you are underwater:

• HARPTA is based on the gross sale price, not your gain. Even if you are selling at a loss, the 7.25% can be withheld at closing unless you qualify for an exemption or a reduced-withholding waiver.
• You can often recover it. Because an underwater seller usually has little or no taxable gain, you can typically apply for a waiver (Form N-288B) before closing, or file for a refund (Form N-288C / your Hawaiʻi return) afterward. Our team coordinates with the title company so this is handled correctly.

We walk through this in detail on our HARPTA tax in Hawaiʻi guide. If you are a Hawaiʻi resident, HARPTA withholding generally does not apply to you — but you should still confirm your residency status with the title company.

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Tax Implications of Forgiven Mortgage Debt

Here is a piece many homeowners do not expect: when a lender forgives part of your mortgage debt — as in a short sale where the deficiency is waived, or a deed in lieu — the IRS may treat that forgiven amount as cancellation-of-debt (COD) income, which can be taxable.

According to the IRS, under the general rule of Internal Revenue Code §61(a)(11), canceled debt is included in gross income, and lenders typically report it on Form 1099-C. However, IRC §108 provides important exclusions, including:

• Insolvency exclusion — if your total debts exceeded your total assets immediately before the cancellation, some or all of the forgiven debt may be excluded from income.
• Qualified principal residence indebtedness — federal relief (the Mortgage Forgiveness Debt Relief framework) has, in various forms and years, allowed homeowners to exclude forgiven debt on a primary residence. The availability and limits of this relief change over time, so this is exactly the kind of thing to verify with a CPA for the current tax year.

There is also the separate matter of capital gains if your home somehow sells for more than your cost basis, though that is uncommon when you are underwater. Either way, the tax side of an underwater sale is real money, and we strongly encourage you to read our guide to capital gains tax when selling a house in Hawaiʻi and to talk with a licensed Hawaiʻi CPA before you sign anything.

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How a Cash Sale Works When You’re Underwater

Selling to Hawaii Property Buyers when you are underwater is different from a standard cash sale, and we are transparent about how it works.

If Your Shortfall Is Small

If you are only slightly underwater, our fast cash offer plus your ability to bring a modest amount to closing — and the fact that we pay all closing costs and charge zero commission — can be enough to clear the loan and close in 7-14 days. Eliminating the 5-6% agent commission alone often closes a meaningful part of the gap.

If You Are Significantly Underwater

When the gap is larger, a clean payoff is not possible without your lender agreeing to a short sale. In that case, we act as your committed cash buyer and help facilitate the short-sale process:

1. We make a fair written cash offer based on the home’s real, as-is condition and your local market.
2. We help assemble and submit the short-sale package to your lender, with you and your attorney.
3. Our team handles lender communication — the payoff requests, the back-and-forth, the document chase — so you don’t have to live on hold.
4. We close through a licensed Hawaiʻi title company once written lender approval (ideally with a deficiency waiver) is in hand.

What We Handle

• All title search, title insurance, and escrow coordination
• Lender and second-lienholder communication and payoff requests
• All closing costs — we pay them, you don’t
• Coordination with your real estate attorney and CPA
• HARPTA paperwork coordination with the title company for non-resident sellers

Because we buy as-is, in any condition, there are no repairs to make and no showings to host. And because we close fast, the foreclosure clock — if it is ticking — has less chance to run out. If a lawsuit has already been filed, read our foreclosure page; if you are still in the warning stage, our pre-foreclosure page explains your window. You can also start anytime from our homepage.

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Underwater in Hawaiʻi: Traditional Sale vs. Short Sale vs. Cash Buyer

Factor	Traditional Sale (Bring Cash)	Short Sale	Hawaii Property Buyers Cash Sale
Typical timeline	60-90+ days on market	60-120+ days (lender-controlled)	7-14 days, or as fast as lender approval allows
Who must approve?	You (and your buyer’s lender)	Your lender / loan investor — required in writing	You — or your lender if a short sale is needed
Commissions & fees	5-6% commission + closing costs	Commission usually paid from proceeds (lender-approved)	$0 commission — we pay all closing costs
Cash needed from you	Yes — you cover the full shortfall	Usually none (lender absorbs the shortfall)	Little or none — depends on the gap
Repairs required?	Usually yes	Often yes (must be marketable)	None — we buy as-is
Credit impact	Minimal — loan paid in full	Moderate — less than foreclosure	Minimal if paid in full; moderate if structured as a short sale
Deficiency risk	None — fully paid	Possible — get a written waiver	None if paid in full; we push for a written waiver on short sales
Certainty of closing	~20% of financed deals fall through	Lower — depends on lender	High — cash, no financing contingency

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Frequently Asked Questions — Underwater Mortgage in Hawaiʻi

Can I sell my house in Hawaiʻi if I owe more than it’s worth?

Yes. Owing more than your home is worth does not prevent a sale — it just changes how the sale is structured. You can bring the shortfall in cash to closing, negotiate a short sale where your lender approves a reduced payoff, or sell to a cash buyer who helps facilitate one of those paths. The right choice depends on the size of your negative equity and whether you are also behind on payments. Call us at (808) 940-3430 and we will walk through your specific numbers.

What is the difference between being underwater and being behind on payments?

Being underwater is about value — your mortgage balance exceeds your home’s market value. Being behind on payments is about cash flow — you cannot make the monthly payment. They are separate problems that often happen together. You can be current on your loan yet underwater, or behind on payments yet still holding equity. Understanding which situation you are in determines which options remain open to you.

How does a short sale work in Hawaiʻi?

In a short sale, you sell the home for less than the mortgage balance and your lender agrees in writing to accept the reduced amount and release its lien. You submit a hardship package — including a hardship letter, financials, and a purchase contract — and the lender or loan investor reviews it. Approval commonly takes 60 to 120 days or more. Getting the lender to waive any remaining deficiency balance in writing is one of the most important parts of the process.

Will a short sale hurt my credit?

A short sale is reported to the credit bureaus and generally lowers your score, but typically less severely than a completed foreclosure and with a shorter practical recovery period. The exact impact depends on how the account is reported and whether it is marked paid or settled for less than owed. For most homeowners, a short sale is meaningfully better for long-term credit than letting the home go to foreclosure.

Do I have to pay HARPTA if I sell at a loss?

If you are a non-resident of Hawaiʻi, HARPTA withholding of 7.25% of the gross sale price under HRS §235-68 can still apply at closing even when you sell at a loss, because it is based on the sale price, not your gain. The good news is that underwater sellers usually have little or no taxable gain, so you can typically apply for a waiver before closing (Form N-288B) or claim a refund afterward. Our team coordinates this with the title company so it is handled correctly.

Is forgiven mortgage debt taxable in Hawaiʻi?

It can be. When a lender forgives part of your loan — as in a short sale with a waived deficiency or a deed in lieu — the IRS may treat the forgiven amount as cancellation-of-debt income, reported on Form 1099-C. However, IRC §108 provides exclusions, including for insolvency and, in many years, for forgiven debt on a primary residence. Because the rules change by tax year, you should confirm your situation with a licensed Hawaiʻi CPA before closing.

Can I avoid foreclosure if I’m underwater and behind on payments?

Often, yes. Hawaiʻi’s judicial foreclosure process under HRS Chapter 667 is relatively slow, which usually leaves time to complete a short sale or a cash sale before an auction. Acting early gives you the most options. If you have already received court documents, see our foreclosure page; if you are still receiving warning notices, see our pre-foreclosure page — and call us so we can assess your timeline.

How can selling to a cash buyer help when I’m underwater?

If your shortfall is small, our zero-commission, all-closing-costs-paid cash offer can close the gap and let us close in 7-14 days. If you are significantly underwater, we act as your committed buyer and help facilitate the short sale — assembling the lender package, handling the back-and-forth communication, and closing through a licensed Hawaiʻi title company once written approval is in hand. We buy as-is, so there are no repairs or showings, and we are always honest about what is realistically possible.

Do you buy underwater properties on all Hawaiian islands?

Yes. Hawaii Property Buyers purchases properties across Oʻahu, Maui, the Big Island (Hawaiʻi Island), and Kauaʻi. Our Honolulu-based team understands each island’s market and the layered-debt situations that most often cause negative equity here. Whether your property is in Honolulu, Kahului, Hilo, Kailua-Kona, or Līhuʻe, call (808) 940-3430 and we will come to you.

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Owe More Than Your Home Is Worth? Let’s Talk Honestly.

What you can expect when you call:
– A real conversation with someone who knows Hawaiʻi real estate
– An honest assessment of your negative-equity numbers — no runaround
– A fair cash offer within 24 hours of seeing the property
– Help facilitating a short sale with your lender if one is needed
– Zero fees, zero commissions, zero pressure

Hawaii Property Buyers LLC — locally owned and operated in Honolulu since 2021.
2032 S Beretania St, Honolulu, HI 96826
(808) 940-3430 | hawaiipropertybuyer@gmail.com

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[TESTIMONIAL PLACEHOLDER — Replace with real underwater/short-sale testimonial when available]

“[First name + last initial], [City, Island] — [Property type]. [Specific outcome: e.g., ‘We were $60K underwater after a HELOC and thought we were stuck. Their team facilitated a short sale, the lender waived the deficiency in writing, and we closed without bringing cash to the table.’]. [Date]. ★★★★★”

Instructions: Collect a real testimonial from an underwater or short-sale seller. Include first name + last initial, city/island, property type, specific outcome, and date. Add a reviewer photo with permission for maximum trust impact.

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Written by Robert Koncal, owner of Hawaii Property Buyers LLC. Robert has been buying residential properties across the Hawaiian islands since 2021, helping homeowners with underwater mortgages, foreclosure, pre-foreclosure, probate, divorce, and other challenging situations sell quickly and stress-free. Based in Honolulu, Oʻahu.

Disclaimer: This page is for general informational purposes only and is not legal, tax, or financial advice. Negative-equity sales, short sales, HARPTA withholding, and cancellation-of-debt tax rules are complex and change over time. Please consult a licensed Hawaiʻi CPA and a licensed Hawaiʻi real estate attorney about your specific situation before making any decision.