The home mortgage crisis and subsequent recession have had a devastating effect on many homeowners. According to a report by First American CoreLogic, 23 percent of U.S. homeowners owe more on their mortgage than the home is worth. In other words, their home value is underwater and they have negative equity in their home.
“Many people who have negative home equity believe their only option is foreclosure, but there are other alternatives. However, the worse thing they can do is nothing,” states Janis Wirt, a Realtor with Keller Williams Realty of Greater Cleveland.
Analyze your situation
If you need to sell your home in the short-term or you cannot keep up with the mortgage payments, you may want to consider the following steps to help analyze your situation. First, look at your mortgage documents to determine your current balance, interest rate and years remaining on your mortgage.
Individually invite three knowledgeable Realtors to look at your home and to estimate a market value range. They can supply comparable sales information for homes in your area and suggest a sales/marketing plan. Next, meet with your mortgage holder and discuss your situation and possible mortgage modifications.
Sit down and discuss the situation with your family or trusted adviser and answer the following:
•What is the estimated market value of your home and how much is the mortgage?
•How much is your home value underwater?
•What is the probability of a sale within six to nine months?
•If you could, how long would you stay in the home? More or less than five years?
•What are the possibilities of refinancing or modifying the mortgage?
•What is your overall financial and credit situation?
•What are your housing alternatives?
Under water options
Depending on your overall financial situation, there may be several options to deal with negative home equity. The “Making Home Affordable Initiative” launched by the federal government in early 2009, provides incentives to lenders to work with homeowners. http://www.makinghomesaffordable.gov/. In these tough economic times, the government wants to keep citizens in their homes and lenders are not looking forward to foreclosing on more properties.
Refinance. Interest rates are at historically low levels. If you are current on your mortgage payments, your loan to value is between 80 percent and 125 percent, your loan is backed by Fannie Mae or Freddie Mac and you have income to support the new mortgage payments, you may be able to refinance with a new fixed rate loan.
Lender workout. For borrowers at risk of loan default and who have experienced financial hardship, lenders may allow a loan modification. This could include modifying the terms of the loan, agreeing to a repayment plan or even signing over the property to the lender for debt forgiveness.
Sell and pay off the balance. If you can sell the house and pay off the remaining loan balance at closing from other assets, such as savings or an IRA account, you can avoid the negative credit damage of a short sale or foreclosure.
Short sale. The owner agrees to sell the house for less that the mortgage balance and turn the proceeds over to the lender. The lender also agrees to the sale and to take a moderate loss on the loan versus the time and potential high loss through foreclosure. The owner may have some or all of the liability for the unpaid balance. A short sale may negatively impact the owner’s credit.
Foreclosure. If the owner fails to make payments and defaults on the loan, the lender can foreclose on the property. In many states, the property is sold at a public auction and the proceeds are given to the lender. The previous owner is still responsible for the difference between the sale proceeds and the loan balance, plus fees and legal expenses. Foreclosure will significantly damage an individual’s credit.
If your home value is underwater, analyze your situation, get more information, determine your best course of action and then implement your plan. You may be able to work out a sustainable alternative.
(Michael G. Shinn, CFP, registered representative of securities and investment advisory services offered through Financial Network Investment Corp., member SIPC. Visit http://www.shinnfinancial.com for more information or to send your comments or questions to firstname.lastname@example.org. (c) Michael G. Shinn 2009. The websites listed are provided as a courtesy and are not under the control of Financial Network Investment Corporation. Please consult a legal professional before implementing any strategy.)