by Susan Herst

I want to move, but I owe more on my home than I can get for it in today’s market.  What are my options?

Usually when a home is sold, the proceeds from the sale are sufficient to cover the pay off of the mortgage(s) and seller closing costs.  But, due to softening home values, no down payment purchases,  and high loan to value equity lines, increasing numbers of homeowners are finding that the current value of their home is less than they owe.  This is known as being “upside down” or “under water”.  If there is no pressing need to move,  most owners just stay in their home until the market improves.  But not everyone has the luxury of time.   Following are the options available to those homeowners with the pros and cons:

Rent out the home.  Pros: preserves the owner’s credit record and provides income to at least partially cover the monthly payments. Cons: owner must either manage the property or pay a management firm.  May affect the owner’s ability to purchase a new home because all or part of the existing mortgage payment will still be counted in the debt ratios. Usually there is still a negative cash flow from the house since the mortgage payment, property taxes, insurance and maintenance costs will normally be higher than the incoming rent when the mortgage is higher than the market value.

Bring cash to closing to cover the difference. This is usually the best option.  It can make sense to borrow from your retirement account or family in order to make it work.  Pros: preserves the owner’s credit record.  Ends the owner’s responsibility to pay the mortgage and maintain the property.  May provide a tax loss which will reduce the seller’s taxes for that year.  Makes it easier to qualify for a new house since there is no remaining payment on the old house. Con: cash outlay

Short sale.  A short sale is when the seller’s mortgage company agrees to release their lien for less than is actually owed on the loan.  Pro: allows the seller to sell the house without bring cash to closing. Cons: creates a very serious derogatory on the credit report which will prevent the purchase of a new home for 4-5 years and potentially make it difficult to obtain other types of credit such as car loans, credit cards, etc.  Usually takes 3-6 months to get agreement from the mortgage company.  The mortgage company will generally not agree if they believe the owner does have the ability to continue making the mortgage payments or to bring money to closing.

Should you, a friend, or a family member find yourself in the situation where you owe more on your home than it is worth, let us help you navigate your choices.  Offering our confidential, real estate expertise in this complex environment is our business.  Thank you Lucy Haislip of Benchmark Mortgage for your insights.

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