What is an upside-down mortgage?
An upside-down mortgage/underwater mortgage and having negative equity all mean the same thing. They all mean you owe the mortgage company more than the home is worth. For example, if a property owner still owes $350,000 on their mortgage, but the value of the home drops for some reason to $320,000. The mortgage is referred to as an upside-down or underwater mortgage. Property owners usually accrue equity as they pay off their mortgage. In this upside-down mortgage scenario, the property owner has $30,000 in negative equity.
Causes of an Upside-down Mortgage range from high-risk mortgages to fluctuating home values. Some mortgages have more risk both for the lender and for the borrower, but they may allow some people to qualify for a loan when they wouldn’t be able to otherwise.
Nontraditional mortgages allow buyers to make payments only toward the interest for the first few years, keeping payments low, but this doesn’t allow them to make any progress towards paying down the principal or to build equity. It could lead to an upside-down mortgage. Also, with a negative amortization mortgage the interest is deferred and added to the principle causing the buyer to owe more than the original loan. Buyers in these situations don’t have much equity in their homes the first few years.
Real estate prices tend to drop when the demand for houses drops either due to a struggling economy or because there are more houses on the market than there are buyers to buy them. Home values may also decrease because a particular location becomes less desirable to buyers. For example, if the crime rate increases or if businesses and community support systems fail it may cause a decline in real estate values.
Borrowing against most or all the equity in your home or putting little or no money down can also lead to an upside-down mortgage.
When you’re upside down on your mortgage it’s not an ideal situation. It may affect your ability to refinance for a lower interest rate or to sell your home quickly or for a profit.
But if it happens, you do have options.
One option not considered often enough is to sell your home by offering owner financing. If your home is in good to excellent condition you may want to consider lease to own or owner financing to sell your house and not lose any money due to the house being valued less than the amount you owe. In Fort Worth there are many people with credit challenges looking for a way to buy a house. You might be able to find quality tenants who are willing to pay a bit higher than market value to retain the option to buy the house in a couple of years. During the time they are renting with the option to buy, they are paying a little bit extra each month on top of the rent payment to help them be able to make the down payment at the end of the rental period where they will have the option to buy. If the buyers default on their part of the deal, then you still have your home plus the extra money they paid towards the down payment. For more information on owner financing check out these websites:
Estimate the chance the value might increase if you stay. Contact Texas Best Home Buyers for an estimate of the value of the home itself and of homes in your area. We can help you weigh your options and give you our honest thoughts on the likelihood the property will increase in value. Your best option might be to hang in there and to stay if you can. Also, if you are able to put in some sweat equity and make some improvements it might increase the value of your home.
Refinance with a special program. Check out the Fannie Mae’s High Loan-to-Value Refinance Option, Freddie Mac’s Enhanced Relief Refinance, and the Streamline Refinance for FHA, VA, and USDA loans. One of these may help you to keep your home while obtaining a lower monthly payment and interest rate.
Negotiate a principal reduction program with your bank. With this a bank would have to forgive the debt that is higher than the value. It doesn’t hurt to ask because if it came to a short sale that would also involve forgiving the debt. Why not ask them to forgive you, the person who has made payments on time rather than a third party.
A short sale is a sale of the home for less than you owe. The mortgage company must approve a short sale, but the process for a short sale can begin if you owe more on your house than it is worth and if you can prove financial hardship. For most, it is a much better option than foreclosure. The banks have fewer costs than with foreclosure and borrowers’ credit is not damaged as much as in a foreclosure. Borrowers may be able to buy another home after 2 years. Most often a short sale can take place much more quickly than a foreclosure and leave you with your dignity and more of your credit score intact.
A direct sale to a company like Texas Best Home Buyers is a quick and easy process if you need to sell a house in Fort Worth that is worth than less than you owe. With Texas Best Homebuyers the amount offered is the amount you’ll get at closing. There are no hidden fees, and we don’t work on commissions, so you don’t have to worry about losing even more money coming out of the sale. You’ll have ZERO closing costs. We will listen to your needs and concerns; answer any questions you may have and make the selling process as easy as possible. Contact the experienced professionals at Texas Best Homebuyers (817) 808-4911 We are experts in this market and can get you the information you need on the pros and cons of listing on the traditional market vs. a direct sale. Being fully informed will help you make the best decision, and we would be happy to help!