With the recent drop in housing values, many people find themselves “upside-down” in their mortgages. Being upside-down means that you owe more than your home is currently worth. Sadly, this means that most of these homeowners cannot qualify for a refinance to lower interest rates or borrow any more money against their homes to meet other financial obligations.
It is not uncommon for people to be upside-down on a car loan. When you first purchase a vehicle, the value drops tremendously in the first year, and you probably owe more than the car is worth. However, with vehicle financing, you are only obligated to make payments for four to six years. Being upside down in your mortgage is far more serious, as you have a thirty-year obligation in this case and may not be able to financially maneuver yourself into a better position for quite some time.
What can I do if my home equity is under-water?
Many people who find themselves upside-down in mortgages are required to sell their homes for various reasons. Perhaps they are moving to pursue another job, or they have life changes that require them to downsize. Unfortunately, selling a house that is upside-down in its mortgage is nearly impossible when using traditional methods. No one wants to pay more for a house than the appraisal value, and few mortgage companies or banks will loan that kind of money anyway. Most banks and mortgage companies want to make a loan for about 80 percent of the home’s value.
This leads to severe problems if the holder of an upside-down mortgage must sell. Legally, the person cannot even accept an offer for a portion of the mortgage price, since he or she must pay off the mortgage when transferring the property. Therefore, the owner of an upside-down house is caught in a deepening spiral; faced with payments that are becoming impossible to make, the only option may appear to be foreclosure.
However, there are other options for selling your home if you are upside-down
First, the government’s Making Home Affordable or MHA® program may offer relief to some homeowners. For most of these programs, the homeowner must be current on payments or be able to show severe financial difficulty.
There are also more traditional options for helping you sell an upside-down house. A short sale may be the best solution for these types of homeowners, especially if the amount owed on the house is not greatly above the value of the home. Short sales happen when a bank allows a homeowner to sell the home for less than it is worth and sign a new note for the balance owed. While the homeowner is still liable for the amount over the sale price of the house, this may be the only solution available when a person owes more than the house is worth. Short sales must be approved by the bank holding the mortgage. The lien holder has the right to set a minimum the seller must obtain for the short sale to be concluded. For example, if a family owes $125,000 on a house worth $100,000, the bank may stipulate that the homeowner must sell the house for at least $100,000. The homeowner then signs a note with the bank for $25,000 and continues to make payments on this amount after the transaction is completed.
Another option is the lease-ownership of your current home. Lease-to-own has become popular in the last few years as buyers who cannot sell their homes are matched with those who cannot qualify for mortgages. If a young family is denied mortgage approval but still wants to buy a home, they may contract with the owner to pay a “rental” for three years, a portion of which is applied to the purchase price. For example, if the bank requires a 20 percent down payment on a $100,000 to qualify the family for a mortgage, they may “rent” the home in question for three years, paying an extra $300 per month which is held by the homeowner toward a down payment. At the end of three years, the family has saved over $10,000 toward the down payment and can add another $10,000 of their own money to pay the down payment and complete the purchase for a pre-agreed price. Lease-ownership is popular with upside-down homeowners because they have a steady income with which to pay the mortgage, and still have the prospect of selling the home in three years’ time.
Finally, those who find themselves upside-down in mortgage value may consider renting their homes. Rental involves its own problems, but does provide income to meet mortgage payments during the interim between the time the owner must move and the time he or she is finally able to sell the home.