The pain of having a home worth less than you owe can be unbearable. It is an emotional roller coaster that takes a toll on the psyche. The notion of being “upside-down” in your mortgage – owing more than your home is worth – is one that plagues American homeowners.
In fact, millions of Americans are in this very predicament. According to real estate analytics firm CoreLogic, there were 1.5 million or 2.8% of homes with “negative equity” in the fourth quarter of 2020. That means they were worth less than what was owed on the mortgage.
American households control nearly $26 trillion in owner-occupied real estate, according to the Federal Reserve’s 2019 report on household balance sheets. That’s more than the value of all the mutual funds and corporate shares they own. (1)
Negative equity means the value of your home is less than the amount you still owe on your mortgage, making it hard to remortgage or move house. Fortunately, you have a couple of options when it comes to finding an exit route. (2)
It’s a problem that has been exacerbated by the coronavirus pandemic. The pandemic has led to job loss and wage cuts for many Americans, making it more difficult to keep up with mortgage payments. As a result, foreclosures are on the rise.
If you find yourself in this situation, don’t despair – there are some options available.
Stay calm, don’t make any rash decisions, and sell my house fast Huntsville AL – the process is simple and less time-consuming.
Before discussing those options, it’s important to understand the implications of being upside down in your mortgage.
The first is that it limits your ability to sell a home. If you owe more than a home is worth and need to sell, you’ll have to bring cash to the table to make up the difference. That may not be possible for everyone.
The second implication is that it limits your ability to refinance – you may not have enough equity to qualify for a new loan. As a result, you’ll be stuck with a higher interest rate and monthly payment.
The risk of foreclosure is also a pain that one has to face. A process that a lender can take back home if you stop making payments. The foreclosure process can be lengthy and devastating, so it’s important to avoid it if at all possible. This will damage your credit score and make it difficult to buy a new home in the future.
So, what are possible options?
Do a short sale
A short sale in real estate is when a homeowner sells their home for less than what is owed on the mortgage. The mortgage lender agrees to accept the reduced amount in order to avoid a foreclosure.
A short sale is often seen as an alternative to foreclosure because it can help you avoid some of the credit damage associated with it.
Another thing, a short sale is not easy to do – you’ll need to find a buyer who is willing to pay the reduced amount. And a mortgage lender’s approval is required. The process can be complicated and time-consuming. But avoiding foreclosure is worth the effort.
Benefits of doing a short sale
- Avoid the foreclosure process and the credit damage associated with it.
- It is typically less damaging to your credit than a foreclosure.
- You may be able to walk away from the property without owing anything to the lender.
- No closing costs.
- You may qualify for relocation assistance
- No compensation for the negative equity amount
- Although it’s a little tricky process to complete, less stressful than a foreclosure and less damaging to the credit, and you might not owe anything to the lender in the end – a short sale could be the best option.
Drawbacks of doing a short sale
- Tax implications – the IRS may see the forgiven debt as income, so you may owe taxes on it.
- Credit score will hurt – a short sale will stay on a credit report for seven years and will have a negative impact on your score.
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Increase the property value
Knocking out a wall to build a new bedroom or updating the kitchen with new appliances are just some of the ways you can make your home more valuable. The goal is to make a home enough valuable so that you can sell it for a profit or at least break even. Once the property value starts to rise again, you will have more equity and it can be used to sell the property or refinance into a new loan with a lower interest rate.
Usually market takes a positive turn and the property value starts to appreciate on its own. So, it is worth waiting for some time and making easy upgrades in the meantime that will result in a higher sale price.
We sell house fast Huntsville Alabama is glad to be able to get some money back on homeowners’ investments.
Get a loan modification
A loan modification is when a lender agrees to permanently change the terms of a mortgage. This could involve reducing the interest rate, extending the term of the loan, or both. A loan modification can make monthly payments more affordable and help you stay out of foreclosure.
To be eligible for a loan modification, you’ll need to prove that you’re experiencing financial hardship and are unable to make current monthly payments.
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Refinance your mortgage
Refinancing is possible if you have enough equity in your home. Equity is the portion of a home’s value that you own – it’s the difference between what the home is worth and what is still owed on the mortgage.
If you have at least 20% equity, you may be able to refinance into a new loan with a lower interest rate and monthly payment. Keep in mind that refinancing typically involves closing costs, so consider that when determining if it’s the right move.
Do a deed in lieu of foreclosure
It is a type of deed that is used when a homeowner is unable to repay a loan and the lender wants to avoid foreclosing on the property. The deed in lieu of foreclosure is signed over to the lender, who then takes ownership of the property. It is beneficial to both the homeowner and the lender, as it allows to avoid a foreclosure on a credit report and the lender doesn’t have to go through the costly process of foreclosing on the property.
To qualify for a deed in lieu of foreclosure, you have to be able to make mortgage payments, have no bankruptcy or foreclosure proceedings pending against you, and have sufficient equity in a home to cover the remaining balance. The deed must also be voluntary – the lender cannot force the homeowner to sign it.
Life is one big hole and falling into it is inevitable. The key is to know what you’re falling into and whether or not you can get out of it. But we buy houses Huntsville AL is here to give you a hand. This blog post has hopefully given some insights on what to do if you find yourself in a situation where your house is worth less than you owe. The best course of action will depend on each individual’s unique circumstances.