Owe More Than Your House Is Worth – Written by Ellen Chang Written by Ellen ChangArrow Right Contributing Writer Ellen Chang is a former contributor. Chang focused his articles on mortgages, home buying and real estate. His list has appeared in national business publications, including CBS News, Yahoo Finance and MSN Money. Ellen Chang
Edited by Suzanne De Vita Suzanne De VitaArrow Editor-in-Chief Right, Home Lending Suzanne De Vita is the Editor-in-Chief of the Home Lending team, covering mortgage and real estate topics for home buyers, homeowners, investors and renters. . Connect with Susan De Vita on LinkedIn Linkedin Connect with Susan De Vita by Email Susan De Vita
Owe More Than Your House Is Worth
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Buying a home is generally a good investment that allows you to build generational wealth by accumulating capital over time.
However, if you buy when prices are high and the home’s value drops later, your home may lose value. You may end up with a mortgage balance that exceeds this value.
“Being underwater or upside down on a home, car or other asset means you have more liabilities than the current value and have negative equity,” says Greg McBride, the firm’s senior financial analyst.
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Upsides are much more common now than they were during the Great Recession. During the housing crisis of 2008, many borrowers paid far less for their homes than they paid for. Housing markets can be unpredictable and home values can fall due to high interest rates, high foreclosure rates or natural disasters.
Mortgage fraud tends to occur during recessions when home values fall, says Jackie Boyce, international managing director of Partnership Money Management, a nonprofit debt counseling organization based in Sugar Land, Texas.
Let’s say Jane bought her house for $300,000, paid $30,000 down, and borrowed $270,000. Two years later, Jane is unemployed but has a good job opportunity in another state. He has to sell his house and move, but finds that home values in his area have dropped and his house is worth $250,000 – and he still has a $258,400 mortgage. Now it’s underwater, or upside down, on a mortgage.
In addition to falling home prices, homeowners can find themselves in this financial situation when buying a home with little or no down payment, or borrowing most or all of the equity, McBride says.
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“Keep in mind that even a stagnant home price can put you on the wrong side if you want to sell your home soon, because the transaction costs of selling can offset the amount of equity you have,” says McBride.
Another way to reduce the drain is to borrow more than 100 percent of the home’s value or take out a mortgage, which can result in negative payments over the life of the loan, says Holly Lott, senior branch manager. at Atlanta-based Silverton Mortgage.
Most borrowers are able to keep up with payments and “get ahead over time by paying down some principal and/or seeing the value of the home increase,” says McBride.
Still, there are times when a homeowner has to worry about going head-to-head with their mortgage. They include:
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Determining whether you are underwater requires an assessment of your home’s current value. You can use a home value estimator to get a basic idea. If you want to know for sure, get a home appraisal. Once you know the value, you can use your mortgage information to determine if your loan is in default.
With a reverse mortgage, you can choose to stay in your home and continue making payments to reduce the principal balance of the loan.
“You basically get out of the market until values turn around and go up,” says Lott. “At this point, it would be beneficial to make additional payments on the principal balance of the loan and wait until the value of the home increases.”
You have several financing options if your credit is underwater, but you don’t have to be completely out of luck. Talk to a few home loan financing providers to see if there’s anything you can do. If your original loan is an FHA loan, you may be eligible for a refinance.
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Unfortunately, in 2018, Home Affordable Refinance Program (HARP) loans ended and Fannie Mae’s High Value to Value (LTV) program was discontinued.
You can also take the short sale route to avoid foreclosure and move into more affordable homes, McClary says.
In a short sale, the lender must receive less money than is owed on the mortgage, which means a loss for the lender, Lott says. Lenders only consider a short sale as a last resort until it happens.
Another option is to simply walk away from the mortgage — a move called “strategic default” — but like a short sale or foreclosure, it can be dangerous to your future home ownership prospects and credit score. In short, even this option will put you in a bad financial position. If you go too far, your creditor may even hold you responsible for paying the debt.
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Homeowners in these situations should seek advice from a HUD-accredited nonprofit housing counseling agency to “help identify solutions specific to your situation and community,” McClary says. There may be a way to resolve your situation other than leaving, which is really a last resort.
You can finally let your home go into foreclosure. During this process, the lender owns the home and the homeowner is left to clear the debt, but the credit score is worse for wear and tear.
Lott says these choices have long-term consequences. Bankruptcies and foreclosures can stay on your credit report for up to 10 years and, like other options, will limit your ability to buy another home for several years.
Learn how to avoid it to solve your situation. You may be eligible for mortgage relief and
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