If you are a homeowner, you may find yourself stuck in a situation where you owe more on the balance of your mortgage than the value of your home. This is an outcome of one or more events which are sometimes beyond control. A failing neighborhood, reduced real estate prices, wrong borrowing decisions or refinancing to take out equity, leave homeowners with a never-ending debt.
If the balance of the mortgage surpasses the net value of the property, this position is termed as being ‘underwater’ or ‘upside-down.’ In order to avoid getting into this tricky scenario, homeowners may be compelled to sell the home for less than the loan value. However, there are a few solutions that homeowners with negative equity can try to get out of this situation. One of them is to up-stage your property, then sell it at a higher price. Here we go into detail about a few solutions:
Short Selling
You can opt for short selling in case there is a negligible difference between the selling price and your mortgage, or in case the seller has cash to spare. Once you find a buyer, you can seal the deal by writing a check to pay off your outstanding loan. If you are unable to pay off your debt, you have to get in touch with the mortgage holder to set up a short sale.
In order to convince the lender to hold a short sale, a significant amount of paperwork and time are required. Moreover, to make the lender agree, the homeowner should get in touch with a real estate agent who can efficiently handle the sale. The complications may continue even when a buyer is found. Sometimes, the lender services the loan on an investor’s behalf. If the lender agrees to the sale, he will have to collaborate with the investor that holds the loan to complete the transaction. The entire process can take quite some time.
The insurer might come into the picture if the house is encumbered by private mortgage insurance (PMI). The reason the property is insured is to protect the interests of the bank and hence, the insurer has a stake in the whole process. Short sales are easily accomplished. The lender has to approve any offer a homeowner receives and if the lender rejects an offer, a sale will fall through. A few lenders don’t even agree to a short sale. Moreover, a short sale will also harm your credit score.
Foreclosure
Unluckily, homeowners still owe money to the bank, even after they have closed the sale. If a homeowner believes he will not benefit much from the sale, another alternative is to go for foreclosure. However, make sure you weigh all options before taking this step. A foreclosure can be a devastating decision, if not taken after considering other options.
Setting up the sale, the likelihood of owing money after the sale and how your credit score suffer along with taxes must also reviewed. For tax purposes, you might have to pay tax on the difference between your outstanding mortgage and the price at which you sold the home. You should know that a short sale is considered as debt forgiveness.
Other alternatives for avoiding a short sale can be limited. In a perfect situation, a homeowner can live in the home and pay his mortgage until the conditions in the market improve. This way, you can find a seller willing to pay a price that enables you to cover the balance of your mortgage. Homeowners can benefit from other options, such as keeping a roommate for dividing the bills or renting out the house by moving to an apartment. Walking away from your mortgage hugely affects your credit score. When a homeowner falls into foreclosure, it can remain on his credit report for seven years.
Final Thoughts
One of the best ways to minimize the odds of being ‘underwater’ or ‘upside down’ is to pay off your mortgage as soon as you can. This can only be achieved when you purchase a home that you can actually afford. Wise homebuyers begin the process by making a beefy down payment, which helps them avoid purchasing private mortgage insurance (PMI).
It also provides them enough home equity in case the home values decline. Moreover, homeowners are able to extra payments and get out of debt in less time by taking on a small mortgage. Lastly, additional payments increase also help underwater homeowners to get out of misery. Get in touch with professional real estate agents to make the best decision.
