November 15, 2010
Having a hard time selling your home because you owe too much? Perhaps you bought the house at the peak of the market and would like to sell in order to get a bigger home or maybe down size. If you bought in the last 5 years you probably owe way too much on the mortgage unless you made a considerable down payment of 30-50%. According to financial data company First American CoreLogic, 11.3 million U.S. homeowners were underwater on their home loans at the end of 2009. This means that they owed more on their mortgage loans than what their residences were worth. You would like to sell your home or you are in a situation where you really need to sell but you do not know what to do but you do have some options.
Bring cash to closing.
Quite possibly the simplest and least complicated solution would be to take money out of your bank or investments and pay the difference at closing. For example if you have a $400,000 mortgage but you realistically can only sell the house foe $350,000 then the only way you can sell it without doing a short sale is to bring $50,000 to the closing to pay the off the bank. This may seem like a nauseating option but depending on your current situation it may be your best option.
This option is best for someone who is in a position where they can easily afford to continue making payments, their job is stable and they have a decent amount of savings. I had a client who did just this, he sold his condo that he bought at the peak of the market and took a considerable loss on it and he had to bring around $45,000 dollars to the closing table. He did not want to do a short sale and quite honestly he wouldn’t qualify and he really needed to buy a bigger house. The house he bought had dropped in price over $150,000 from when it was first listed, he felt the house was such a bargain that he could not pass it up. That $45,000 he had to take out of the bank was money well spent because he ended up saving money in the overall transaction. He bought the house he needed and was happy with his decision.
Some people want to sell but may not be getting such a huge bargain when they purchase and would really need that $50,000 as a down payment. In this situation this person should consider a smaller down payment on a purchase so that he can pay off his 1st loan and still have enough to purchase another home. Instead of having to come up with 10-20% down this person could opt for an FHA loan where down payments are as low as 3.5% of the purchase price.
Renting the home is another option but perhaps the rent will not cover the mortgage and the taxes. If you are lucky enough to break even on the mortgage then renting is a great option. Others may find that the rent is not covering the mortgage and they still have to come up with $300-$500/month to make up the difference. That may or may not be more attractive than taking cash out of your savings to pay off your loan at closing. Consider that fact that you would have to rent it for at least 4-5 years before it would make sense to try to sell it with the hopes that home values have started to climb back up.
More and more homeowners are involved in short sales and this may be a last resort option and for some their only option. One thing to keep in mind, just because you owe more than your home is worth does not mean you will qualify for a short sale, if that was the case then everyone who bought a home in the past 5 years would be short selling their home. In order to attempt a short sale you will need to qualify and the 1st step to figure out if you qualify would be to look at your finances. You have to be in a hardship situation in order to attempt a short sale. If you can easily make the mortgage payments and/or have enough money in savings to pay the bank the difference between what you sell the home for and what you owe then your chances are slim.
When your bank looks into your finances and savings and see you have a considerable amount of money they will just tell you that you are not in a hardship situation and to pay the balance at closing or just continue to live in the house and pay the mortgage. Unfortunately many homeowners have limited savings but can afford to keep paying for the house and will just have to figure out a way to stay where they are until someday when the market turns around.
Maybe you thought about refinancing to lower your monthly payment and then maybe you can rent the home and break even thus allowing you to purchase another home. This would allow you to use your savings for the down payment and not to pay off your 1st loan. Under normal circumstances refinancing would be an option but when you owe more than your house is worth you do not have any equity in the house and you would not be able to refinance.
The bottom line is that there are not that many great options to get out of a house when your mortgage exceeds your market value. Possibly the best solution and least complicated would be to bring cash to the closing the pay off the balance but what is best for one person may not be a good idea for another. The fact is that you may just have to do what you can and stick it out for the next 4-5 years until either your finances improve and/or the values of homes stop dropping.