Over-financed, over-mortgaged, underwater, negative equity, or upside down: all of these terms mean the homeowner owes more on the house than what the house is worth. Forbes finds that, as of Q3 2013, nearly 6.4 million Americans have borrowed more than their house is worth, despite steadily rising home prices starting in 2012.
Houston has a litany of homeowners that own homes that have a larger mortgage than the value of the house. What can these homeowners do when they face this situation?
1. Ride it out
If homeowners can afford the mortgage, tax, and insurance payments, they can simply stay in the house. Eventually they’ll build equity as they continue paying down the mortgage principal. With home prices on the rise — and they absolutely are here in Houston — homeowners who continue paying will eventually find themselves back on solid land.
In some scenarios, the homeowner can even apply to refinance the loan under the Home Affordable Refinance Program (HARP). It is probably in the homeowner’s best interest to consult with an objective and knowledgeable third party before taking this route.
While this option works fine for homeowners who can afford the payments and plan to stay in their homes, not everyone is in this situation. Many homeowners can no longer afford the monthly payments. Others plan to move out of the house in short order.
2. Sell the house at a loss
Just as homeowners can act simply by staying in the house, so they can act simply by selling it. Since they owe more on the mortgage than they will receive when selling, though, they have to make up the difference at the time of sale. This can be quite burdensome, even in situations where the difference between equity and market price doesn’t seem that large.
Consider a $100,000 home over-financed by 10 percent. Add in another 10 percent for closing costs and commissions. The homeowner would have to bring a $20,000 check to the closing table.
Can the average homeowner afford a $20,000 payment just to leave the house? At that point it almost always makes sense to stay in the home and continue building equity (and hoping the house value rises).
Again, not everyone finds themselves in this situation. Sometimes they can’t afford the monthly payment or otherwise have to get out.
3. Short sale or foreclosure
In a short sale, a bank agrees to sell the house for less than what the borrower owes. This might sound great, but it seriously damages the homeowner’s credit. During the years it will take to recover, the homeowner will face many hardships, including:
- Decreased job opportunities, since many employers now run credit checks on candidates
- Increased cost of insurance
- Higher interest rates on credit purchase, such as future houses, cars, and more
Additionally, short sale is by no means a short process. It can take nearly a year to complete, leaving the homeowner in limbo.
Homeowners find themselves in foreclosure when they fail to make mortgage payments for three consecutive months. At this point the bank can being proceedings to sell the house at public auction. The homeowner’s credit is destroyed for seven years.
Foreclosure is the worst of all options and akin to bankruptcy.
4. Sell the house to an all-cash home buyer
At HoustonHouseBuyers.com we have many options for homeowners with underwater mortgages. In some instances we can take over payments, subject to the existing mortgage agreement. We can also set up leasing arrangements. In any case, we can help take the burden off the homeowner, without a short sale or foreclosure, or without the homeowner taking a huge loss on the house.
Fill out our sell your Houston house form so we can discuss the various options available.