Even in today’s real estate market, homeowners can still find that their homes have little-to-no equity in them. Some may even find themselves “underwater,” with the balance of the mortgage is higher than the current value of the home. This can make it seem impossible to sell.
But what if you need to get out of a home? Maybe circumstances have changed – a job loss, an illness, a required move – and you can’t wait it out and hope your home value rises. There are some solutions available to you in this situation. Keep reading for more details!
Understanding Your Mortgage Payment
If you have a fixed rate loan, your mortgage payments are made up of the interest on the loan, and the principal amount you were loaned. You may or may not know that with a typical 30-year mortgage, you pay very little principal in the first few years of the loan. You primarily pay interest. As the mortgage matures (in other words, the longer you are paying your mortgage), the more capital you pay towards your loan as opposed to interest. This gradual repayment of both the principal and interest is called amortization.
The advantage to amortization is that you gradually repay the principal and interest, instead of having a large interest payment due when the loan matures. However, the downside is that if you have only been paying your loan for a short time, it is likely that you haven’t paid much towards your principal. Basically, you haven’t made enough payments to build up much equity in your house.
Not Enough Equity
If you’ve owned your home less than two years and took out a type of mortgage loan that was greater than 90% of the purchase price, it’s possible you don’t have enough equity to pay closing costs on a new sale. Closing costs, including a real estate commission, can run 7% to 11% of the purchase price. These are first and foremost the buyer’s responsibility, but buyers will often negotiate for sellers to pay at least a portion.
For example, let’s say you bought your house two years ago and you owe $200,000 on your mortgage. Everything was fine until home values started trending down in your area. Now your home (that you still owe $200,000 on) is only worth $185,000. Your mortgage is $15,000 more than your home’s value. Because you owe more than your home is worth, your mortgage is considered “underwater.” Sometimes you’ll also hear the term “upside-down” to describe an underwater mortgage.
Although negative equity isn’t always preventable, understanding the reasons why it occurs can help you find the best solution to move the needle toward positive equity. Underwater mortgages became really common after the housing crisis in 2008, when home values plummeted and homeowners with adjustable rate mortgages could no longer afford their payments. Over a decade later, more than 9% of homeowners are still underwater. That’s a lot better than it was years ago, but 9% of homeowners means we’re talking about 4.5 million Americans.
What Can You Do If You Have to Sell?
If you go through with a traditional home sale and your home has little, no, or negative equity, you could be on the hook for the difference between the amount of the sale and the balance of the mortgage. If you don’t have savings to cover the amount, luckily, there are still options available to you to get out of the home.
Ask for a Short Sale
Not all lenders will agree to a short sale. There are specific requirements and conditions that will persuade a lender to forgive the debt. But, if the circumstances are bad enough and your lender will work with you, sometimes it’s the best option.
A short sale occurs when the home lender agrees to accept less than the full amount due on the mortgage to close the deal. If you decide to apply for a short sale, make sure you’re aware how it might negatively affect your credit score.
For example, one seller in North Sacramento had no assets, no income, and he had refinanced his home over market value. He owed more than the home was worth. For him, negotiating a short sale with the lender meant he could walk away from the property without a foreclosure on his record. He also had to pay taxes on the amount of debt that was forgiven, but that amount was taxed at a low tax bracket of 15%. Paying 15% of short sale taxes was preferable to bringing in the entire amount in cash, plus closing costs, to sell.
When you sell a home as a short sale, you will have to get the permission of the bank to sell at the lower amount. It can be a challenge, especially if you are not comfortable with the terms, conditions, and requirements – or don’t have the time to chase down the bank, who are notorious for being challenging to get a hold of.
At Bristol Home Buyers, we have dedicated short sale negotiators that we work with to complete the whole process on your behalf, saving you the headache of dealing directly with the bank. Selling to us can take the hassle out of the process.
Here are the steps of a typical short sale:
- Talk to a Professional: To begin the process, you should talk with professionals with experience in short sales. Attorneys and tax advisors can offer advice on the process, and real estate professionals can negotiate with the bank of your behalf
- List: After you have contacted the bank, they may insist that you list the property on the CT MLS exchange to make sure that you have the maximum visibility to receive the “highest and best” offer. You may also work with a real estate investor, like Bristol Home Buyers in this process.
- Offer Submission: Once you have listed the property, you will need to submit the highest and best offer to the bank for their review and decision as part of the short sale package.
- Lender’s Review and Response: Lenders review the “short sale package”, and perform their due diligence and any required inspections. They can then either accept the short sale offer or reject it.
- Close on the Sale: Upon acceptance of the short sale offer by the lender, the required title work, such as a title search and securing title insurance, is completed and closing is arranged between the buyer and sellers’ attorneys.
Sell the Home “Subject-To”
However, with little or negative equity, sales become more difficult. This is where subject-to an existing mortgage comes in, what this means is that we the buyer of the home takes over the title to the property, but the seller retains the mortgage itself.
We make the existing mortgage payments directly to the lender through a professional escrow agent, no legal transfer of the mortgage from the original owner’s name into the new owner’s name.
Contrary to popular belief, the ‘Subject to’ method is perfectly legal. This is a method that allows people to get around many of the obstacles in their way, so it’s understandable that people would be suspicious of it. However, real estate agents and experts will actively recommend the ‘Subject to’ method to clients who are in situations where they have very little time and a lot to lose.
You might wonder, “why would they want to trust somebody else to make my mortgage payments?”
First of all, if they are thinking about selling a home subject-to the existing mortgage, they will definitely want to make sure to do so with an investor and not a person who wants to live in the property. An investor will make the payments because profits are on the final sale of the property.
The advantage of selling subject-to is that someone else takes over making the mortgage payments and can prevent foreclosure. On top of that, you can often put more cash in your pocket because buyers that take over mortgage payments will pay more since they don’t need to secure financing. You also will get a higher pool of potential buyers – creating a bidding effect. Bristol Home Buyers buys property subject-to, so if you are interested in more information, do not hesitate to call us or fill out the form below!
Overall, if you have little-to-no equity in your home, or even if your home is “underwater” and need to sell your house, you have options. You can negotiate with your bank to get them to agree to a short sale, where they accept less than the amount owed on your mortgage, allowing you to avoid the foreclosure process and limit the effect on your credit score. You can also sell your home “subject-to,” where an investor takes over the payments on your property, though the mortgage stays in your name, easing the burdens of the payments off your back. No matter what the situation you find yourself in, we are here waiting to help home owners just like you. Call us today or simply fill out the form below and we will get back to you!