You might want to move but found out that you have negative equity on your home. Negative equity can have implications if you want to sell your home or refinance a mortgage loan. Here’s what you need to know about negative equity and what to do if you owe more money on your mortgage than your home is worth.
What Is Negative Equity?
You have negative equity in your house when the outstanding balance left on your mortgage is more than what your home is worth. Some refer to it as being “underwater” or “upside down”. For example, you might have bought a house for $250,000. When you want to sell, you may still owe $225,000 on the mortgage loan but your home’s value is only $210,000. This means you have negative equity and you may not be aware of it until you want to sell your home.
How Do You Sell When You Owe More Than Your Home Is Worth?
Often, you will need to pay your lender the difference between the value of your mortgage loan and the price you sold your home for. If you don’t have enough money, you have a few options to consider before you liquidate a home that is underwater.
1. Wait until your home’s value rises
The simplest option is to continue making the mortgage payments and wait for the market price of your home to increase. However, it’s difficult to predict how long this would take because it can be dependent on numerous external factors and the state of the market. You need to decide how long you’re willing to wait.
You can also rent out the home while you’re waiting for the value to increase. Some people rent out their home and use the income to rent another property with a lower monthly rental. You can use that additional income to reduce your mortgage loan balance.
2. Make extra payments to increase your equity
Find ways to make extra payments on your mortgage loan. Pay down the debt as much as possible to lower the outstanding balance you owe and increase your equity. Some lenders allow you to make more payments to lower your principal while others might have penalties for doing so. It’s important to work with your lender to help you understand the options available.
3. Add value before the sale
Another option is to invest into some upgrades to help increase the value of your home. This could include changing old appliances, upgrading your kitchen or bathroom, and replacing heating and cooling units. You could also repair issues with the roof, foundation or plumbing, add a patio or upgrade your basement. Sometimes a fresh coat of paint can make a huge difference.
Make sure that the cost of the upgrades are affordable and don’t add significant financial burden to you. If you find yourself having to take out loans to fund the costs, it may not be worth it to put yourself in more debt.
4. Short sale
A short sale is when you sell your home less than the outstanding mortgage balance. A lender or a bank will only allow you to do a short sale if the monthly mortgage payments you owe are too high and you can’t afford the amount, you cannot refinance your debt and you don’t have enough cash to pay the difference between the value of your house and mortgage loan value.
For example, if you still owe $225,000 but your home is only worth $200,000, you can find a buyer for $200,000 and your lender takes the loss.
The bank or lender will lose money in the process which is why they typically don’t like to approve short sales, but it is still a better outcome compared to a foreclosure. A foreclosure will typically cost the lender more money.
However, you are reliant on the lender to provide approval. If you can’t get approval for a short sale, you will not be able to do it.
Your credit score will also likely take a hit, although the impact is not as much as what a foreclosure would do to your credit.
5. Sell to a cash home buyer
Find a cash home buyer such as Move On in your state who is willing to make an all-cash offer on your property no matter the condition it is in. You do not need to pay any cleaning fees, repair costs, closing fees or realtor commissions. You also don’t have to get approval and there are no credit checks involved.
If you’re in an urgent need to liquidate your property or are just looking to get rid of an unused house, Move On Cash Home Buyers can help you do so quickly in the greater New Orleans area.
What Happens If Your House Goes Into Negative Equity?
Negative equity only affects you if you want to sell your house or refinance your mortgage loan. If you sell your home, you will need to pay the difference between your outstanding mortgage loan balance and the selling price to your mortgage lender. You also might even have to pay high seller fees and other expenses for the transaction.
Can you roll over negative equity on a mortgage?
You typically cannot refinance your mortgage loan if you have negative equity. You’ll also find it difficult to get a new loan because most lenders require you to have a minimum of 20% equity. However, you may be able to refinance your loans with Fannie Mae and Freddie Mac even with negative equity on the condition that your new loan has a lower interest rate, a lower monthly installment or shorter repayment terms.
Fannie Mae’s program is called the High LTV Refinance Program while Freddie Mac uses the Enhanced Relief Refinance Program. The lenders may have conditions such as being current on your payments and not missing any monthly payment in the past 12 months which would negatively impact your credit. They will likely look at your credit report and income to approve your refinance request. Some lenders also state you cannot have been on the HARP program when it was valid until 2018.
If you have an FHA loan, the FHA’s Streamline refinance Program will allow you to refinance a mortgage that has negative equity. Sometimes you may not even require a credit check or a property appraisal to refinance and there is less paperwork which can be a favorable option for you. You also do not have to pay an appraisal fee.
Alternatively, you can pay down your mortgage loan until you have 20% equity to refinance with your current lender. However, not many people have the funds to make huge lump sum payments.
Does having negative equity affect your credit score?
No, negative equity does not affect your credit score. However, if you have negative equity because you are unable to make your monthly payments, that can have an impact on your credit. A bank and lender will look at your credit report when you want to refinance a negative equity mortgage loan.
How Can You Get Out Of Negative Equity?
There are a few options for you to get out of negative equity.
1. Increase your home’s value
Increase the value of your home by renovating and upgrading features of your home. Some of the easiest ways to increase its value is to renovate the bathrooms and kitchens, add a patio and repair any issues with the foundation or the roof. However, you will need to weigh the benefits of the increase in value versus the cost of the renovations.
2. Reduce your home loan amount
Find ways to either make a larger monthly payment or make a lump sum payment on your mortgage loan to pay it down as much as you can. However, your mortgage lender may impose penalties for prepayment and there may be implications for your credit score. You need to consult your lender before making a larger payment or lump sum payment.
3. Stay in your property
Negative equity does not mean repossession of your property. The simplest option is to stay in your home as you wait for the value of the property to increase. However, this option may not be ideal if you need to move soon and you don’t know when your home’s worth will increase until you are in positive equity.
5. Rent your property out
You can rent your home out while renting another property at a cheaper rate to stay at. You’ll be able to use the money earned from the difference between the rental income and your rental expense to pay down your mortgage loan. Another advantage is that the value of your property might increase during the rental period.
Factors That Contribute To Negative Equity
There are some factors that contribute to negative equity.
Small down payment
If you took out a home loan with a small down payment, you will not have much equity from the beginning. Any drop in the value of your property will immediately put you into negative equity and may not be worth it. You can opt to pay a larger down payment or purchase a more affordable property to move into.
Often, a larger down payment could also help you to qualify for a loan that has a lower interest rate which is much more beneficial in the long run.
Low appraisal value
If your appraisal value is lower than the price you agreed to buy your home at, you may owe the seller the difference between the appraised value and the selling price. Lenders cannot lend you more money than the home is worth when you are buying a home. This will put you into negative equity immediately.
If the market drops, the worth of your house could drop which can put you into negative equity. The problem compounds if you purchased your home at a market peak with a high price. You might have to make higher payments on a loan you took when home prices were still high. Get advice from a real estate agent and make sure you do your research about the market before you take out loans to buy a property.
Loans with high interest rates
If you got your mortgage loan at a high interest rate while buying a home, the majority of your monthly payment will go towards the interest instead of paying down the principal. You may be able to refinance your loan for a lower interest rate with a program that accepts negative equity mortgage loans. This can save you money in the long run.
Decline in the condition of your home
If you do not maintain your home properly and allow it to fall into disrepair, the value of your home will drop which can put you into negative equity. You may want to spend some money on maintenance and repairs to improve the condition and worth of your home. However, if you have to take out loans to fund these repairs, you need to evaluate if it will be worth it to put yourself in more debt.
You may find yourself in negative equity due to real estate market declines, poor upkeep of your home, or high mortgage loan rates and balances. Typically, you will find yourself losing money by selling a house with negative equity. If you still want to do so, you might be able to get approval from your lender for a short sale.
There are other options available. You can wait it out, upgrade your home or reduce the amount you owe on the mortgage loan as much as possible. One option if you need to move quickly is to find a cash home buyer.
Move On Cash Home Buyers makes offers to help homeowners looking to sell their homes quickly in southern Louisiana. You also save on the fees that come with a typical real estate transaction which can add up to thousands of dollars in savings.