Negative Equity: What to do when selling a home with negative equity

Negative Equity: What to do when selling a home with negative equity

Negative equity is a financial disaster and dealing with it, maybe a nightmare. Getting out of it entails countless dilemmas that often leave people drained. It becomes worse when one has a property to sell like a home. There are a few possibilities that one can consider. However, all of the options come with consequences, some of which may be worse than others. Therefore, it calls for professionalism and above all, caution.

The complexities surrounding the sale of a home during negative equity are vast. There’s a choice to make and the consequences that one will incur. The bottom line is, selling a home is delicate unless one has the financial capability. You may decide to pay the difference between mortgage and property value to make the sale easy. You can also choose to continue with mortgage repayment and keep the property until its worth improves. Both of the methods require that you have enough cash.

This article explores the issue of negative equity and the options for selling a home.

What is Negative Equity?

Negative equity is a situation where a property owner owes more than the worth of their property. Today, the fluctuating economy has left many people in negative equity. As such, most people are unaware of their status until they decide to sell their property. One can always check if they are in negative equity by checking the value of the property in the market.

Consider the following scenario; a few years ago, you bought a home. The home was valued at $150,000 as per the then market. You purchased it at a mortgage of $120,000. Currently, you need to relocate. So you consider selling the house. Upon checking the market prices, you find that the value of your home is $100,000. You might consider selling the home, but that means that a mortgage of 20,000 is still pending. You would then be in negative equity.

Selling a House with Negative Equity

Even though the options are slim, selling a home is still possible after one considers basic options. A key consideration when selling a house is that you will have to pay a full mortgage, whether you sell the home or not. Here are some of the options:

Short sale

This is where the homeowner sells it at a lower price. The homeowner approaches a buyer and convinces the lender to agree to terms. However, a lender may not agree to the terms, but it is worth trying given the conditions. A short sale will often negatively affect one’s credit as the remaining mortgage amount will still be paid.

Paying the difference before the sale

Since the price of the house has reduced, you can still consider paying the difference through a loan or personal savings. After settling the difference, you will then be free to sell the home at its current price.

Foreclosure

Foreclosure often means that one has no options. One will decide to walk away from their property and let the lender foreclose it. It is often the worst decision. A foreclosure will likely affect the credit score of a homeowner for seven years. In those seven years, one will not be liable to get another home.

Keeping your home

Instead of selling it and losing a lot of money, there is always the option of keeping the home and paying the mortgage slowly. You will have to keep your house until its value matches your mortgagee and then comfortably sell it.

Renovating the house

If one is desperate to sell the home, they might take a drastic move and renew it. Renovation might go either way as it is not a guarantee it will sell. Whether the house sells or not, one will have already incurred additional expenses and thus lose money.

Renting the home

When you need to move out of the home, consider renting it. Renting is a good option since one will pay the mortgage using the rental income. However, the house rent may still be low, considering the property is in negative equity. Therefore, the homeowner will wait for long periods until the home is out of negative equity and sell it comfortably. The rental income will also depend on factors such as property upkeep, agent fees, and insurance costs, which will make the rent income low.

What are the Causes of Negative Equity?

The most obvious cause of negative equity has probably changed. Several reasons can lead to this, especially if the buyer failed to look at essential things during the purchase. Here are some of the scenarios that can significantly lead to negative equity.

Economic shifts

This might lead to fluctuating prices of property, such as a home. If you buy a house when the economy is at a high point, the chances are that one time you will be in negative equity. That means that the best time to buy a house is when the economy is at its low point.

Overpricing of a property

Sometimes, houses are priced more than they are worth. As a buyer, you’ll need to consider the condition of the home and the price. If it’s not worth the price, the best option is to negotiate or walk away from the deal. Avoiding negative equity is better than being caught in one.

Property damage

Over time, the property will likely get damaged. Damage may occur through natural wear and tear or events such as fire and flooding. Such mishaps will force a homeowner to renovate before considering selling the home. Eventually, if the home was not insured, the owner will end up incurring more on renovations leading to negative equity.

Loan to value ratios

When one decides to use a loan to buy a home, the loan ratios affect its pricing. When the loan ratios are high, any slight drop in the value of the house leads to negative equity. Therefore, it’s imperative to have a clear understanding of the loan value before forging ahead with the deal.

Despite the above, you might still need to sell the property. A good option that will get you out of the dilemma is selling the house to a regulated company like Prospect Now. At Prospect now, we help people get out of financial burdens by buying their property. We purchase homes up to 85% off the market value. We also ensure the process is fast with minimal complications.

Are you in negative equity, and you’re not sure of how to sell the house? Give us a call today to have your home sold fast without any stress.