Help with a negative equity home sale.

Need to sell a house underwater?  If you don’t know what this means then let me enlighten you. It means the house is not worth what you need to sell it for.

Maybe your job has just relocated you, a family member is sick, the neighborhood is declining. Whatever the reason is, you need to move, and you need to sell your house fast. You call up a realtor and they tell you all the things that you need to do to get it sold, such as cleaning up, painting the house and even what he believes it will sell for. But we have 1 problem…… The house is worth less than you paid for it. This does not mean that you made a mistake in buying the home, lots of other factors can combine to make this situation occur. In BC for example if you paid market value for a home and only put down a small deposit (5%) and you have paid the property transfer tax bill and had moving costs you might find that you are in this situation. No one thinks they will need to move unexpectedly but it does happen.

Here are some options that can help you in this situation.

Check with your lender if they will let you rent the house

Some lenders may be able to allow you to rent the unit out. If you are relocating a reasonable distance away from your current house, most lenders will let you to rent the home to a tenant and use the income to offset  your debt/income ratios.  The lender will usually offset the rental income by a 25% vacancy factor by leasing the home out for whatever fair market is. This means they can only count 75% of the rental to offset the debt.   The remaining is added to your debt ratio. If you are OK with being a landlord and have extra money put aside for any repairs and maintenance needed over the course of years then this may be the way to go. Just remember you have to want to be a landlord. This entails making sure all fixes are done in a timely manner and collecting rents from tenants. Also when the tenants cannot pay their mortgage in time you will need to have a buffer to make that payment

If you are not moving a substantial distance, then you may not be able go this route.   In he past too many people walked away from their financial responsibilities because of being underwater and this ruined our chances today to make this work.  Things change so fast in this industry so check with your lender to see if this is still the case.

Lease to Buy or Rent to Own Option

When you want to sell a house underwater a lease option is another tool in your arsenal. This option means you still hold the deeds but the buyer is currently leasing/renting the home and someday when they have the money they may use their right to buy it. In this scenario the house is not sold. You still own it. But now you have a prospective buyer in place until he chooses to buy.

In this scenario you are still the landlord and are ultimately responsible legally for anything that happens on the property. Also you are still responsible for most repairs to your home even if you have an agreement with the tenant that he or she makes the repairs. Ultimately it is still your house and there is no telling when the buyer will exercise their right to buy.

Here is an example of how you market your house as lease option:

Say your house was bought for $220,000, you put down $11,000 as a deposit. Your mortgage is $1600 per month.

Here is an example your buyer may offer

$190,000 – Sale price at the end of 12/24 month-lease
$10,000- Option money or non-refundable deposit will be credited towards purchase price.
$1400 – monthly rental payment to you.

In this scenario you end up with $10,000 in your bank account and a positive cash flow of $200 a month. If the buyer exercises their right to buy in 12 – 24 months you end up with your property being sold. This will still leave you with a shortfall on the overall price but you have had $2,400 in income from the house over 1 ($4,800 in 2)  year and the $10,000 in a deposit. This time and arrangement has let you get back on your feet. The buyer may still not buy the home after a year but the incentive of the $10,000 non-refundable deposit will encourage them to stay with the program.

Caution: Never try to do lease option without a real estate agent being involved and make sure you take legal advice and have a proper agreement in place.

Wrap Around Mortgage

A wraparound mortgage is when the seller keeps the current mortgage in place and creates a new one at a higher rate for the buyer that wraps around the original mortgage. It’s a form of creative financing where you the seller are ultimately the lender.

There are both advantages and disadvantages to this form of financing. One advantage is that, in a really bad market, offering a wrap around mortgage could get your house sold faster. On top of this, a wraparound mortgage gives you  the opportunity to earn interest. Hey! I did say you ARE the bank.

The disadvantages is that the Seller is still responsible for the original mortgage debt. Finding a good buyer with  strong financial backing is necessary to make this kind of deal work.

Assuming the mortgage

An assumable mortgage allows a home buyer to take over, or assume, the seller's existing mortgage along with the property. In most cases, the lender must approve the transfer as well as the buyer who wants to assume the mortgage. If approved, the buyer will take over the remaining mortgage payments to the lender and will be legally responsible for the mortgage terms.

SEE OUR BLOG ARTICLE ON ASSUMING A MORTGAGE

In some provinces, the seller may remain liable for the mortgage after it has been assumed by the buyer. However, some lenders may agree to release the seller from any personal liability if the buyer meets the lender's qualifications.

Most fixed-rate mortgages can be assumed, while variable-rate mortgages and home equity lines of credit cannot. The terms of the original mortgage must stay the same. Check with your lender to see if the mortgage is assumable. Your mortgage agreement should show if an "assumption" fee could apply to complete the transfer.

This can be an attractive option for buyers if interest rates have gone up since the mortgage was first taken out. The buyer assuming the mortgage could take advantage of a relatively low interest rate compared to rates currently available.

As our example above:

Say your house was bought for $220,000. Your mortgage is $1600 per month.

If since you mortgaged your home the interest rates have risen then the current repayment for the same terms might have gone up to $2,000 per month. Assuming this mortgage the buyer would save a chunk of money over the term of the mortgage  that could swing the deal. You could strike a deal and even get your deposit back. Of course if this is the opposite and the rates have fallen this option would not be very attractive for the buyer

If the buyer needs to borrow more money in order to assume the mortgage, he or she may be able to apply for a higher amount with the lender. However, if the buyer needs less than the outstanding mortgage balance, the seller will have to pay off the difference. As a result, the seller may be required to pay a prepayment charge.

Homeowners who want to move to a less expensive home and who still have several years left on their existing term can avoid prepayment charges by letting the buyer assume the mortgage. Lenders may charge the buyer a fee to arrange for the mortgage to be assumed.

As with any of the above options your house value has not increased but you can be pro active in working with your lender to ensure that the best outcome is possible and hopefully protecting your credit score in the process.

As mentioned before, see advice from an experienced Realtor and get legal advice.
 

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