Are you upside down on your mortgage? It’s a situation homeowners don’t want to be in, but it does happen to more people than you might think. If you owe more money to your house than its current worth, it is easy to feel stressed and overwhelmed. That’s completely understandable. Just know that there are many Americans who have been where you are- and they’ve been able to get through it. The good news is you have options, and we’ll cover the ones you should consider, including selling an upside-down house in Tennessee.
What is an Upside Down House?
An upside-down house means you own more on your home than it’s worth. This is also referred to as an underwater mortgage. Here is an example of an upside-down house.
Let’s say you purchased your Memphis home three years ago, and you owe $150,000 on your mortgage. Everything was going smoothly until the housing values started trending downward in the Memphis market. Now your property (that you owe $150,000 on) is only worth $135,000.
The mortgage is $15,000 more than the property’s value. Because more money is owed than what the home is worth, the mortgage is considered an upside-down house, or the mortgage is underwater.
Upside down mortgages became quite common after the housing crisis in 2008 when property values plummeted, and homeowners with adjustable mortgage rates could no longer afford their monthly mortgage payments. Thirteen years later, more than 9% of homeowners are still upside down. That’s better than it was several years ago, but 9% is roughly 4.5 million Americans- which is still a lot of people!
What To Do With an Upside Down House?
Being upside down on your house can be an overwhelming feeling. You may feel a little worried that your options are limited, but that is far from the truth. You have several options to turn this situation around, including selling an upside-down house. We’ll explain your options below so you can determine which is the best option for you.
Short Selling your Upside Down House
If you’re struggling to afford your mortgage payments and you owe more than what the house is worth, short-selling your upside-down mortgage is an option. In a short sale, the lender has to agree to sell the property for less than what is owed. This isn’t their ideal choice in the matter (because they lose money), so they will only consider selling in a short sale as a last resort before filing foreclosure.
If you’re interested in selling an upside-down house in a short sale, you’ll need to prove to your mortgage company that you can no longer afford your monthly mortgage payments and have no way of catching up. If the lender agrees to consider a short sale offer, you will need to figure out how to sell your house fast and how to sell without sinking any more money into the property.
Although, as the seller, you will negotiate the terms with a prospective buyer, ultimately, your lender will make the final call whether or not an offer is accepted. That means the selling process really isn’t in your control and more than likely will take a while for you to officially sell your house. That being said, this option isn’t ideal, but it is better than facing foreclosure.
Selling to a Cash Home Buyer
If you want control over your home sale and timeline, you could consider selling your upside-down mortgage to a cash home buyer. Instead of waiting months for your bank to accept an attractive offer to sell in a short sale, you can sell your home directly to a “We buy houses in Memphis” company.
Cash home buyers are different from traditional buyers because they use cash to purchase properties and not bank financing. Because they have the cash on hand, they can make you a cash offer for your house within 24-hours and close in as little as 7-days. They also don’t require repairs or renovations before selling, they will buy your house as-is, saving you time and money.
By working directly with a home buying company, you don’t need to list your upside-down house, hire a realtor or sell by owner. That also means no expensive agent commissions or service fees (service fees are typically seen when selling to an iBuyer). Homebuyers will even pay closing costs. If you need to sell your Memphis property quickly to avoid foreclosure or filing bankruptcy, selling to a local cash home buyer would be a great solution.
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Modifying your Loan
Instead of selling an upside-down house, you can talk to your lender to see if a loan modification is available to you. A loan modification is a change in your mortgage’s original terms, typically initiated by financial hardship. The goal is to help reduce your monthly payments to an amount that you can afford. Common loan modification alternatives include:
- Principal Reduction
The lender eliminates a portion of your debt, allowing you to repay less than what you borrowed initially. This type of loan modification tends to be the most difficult to qualify for, given that lenders usually are reluctant to reduce the principal amount on loans.
- Lower Interest Rate
The lender can reduce your interest rates, which can reduce your monthly payments. But sometimes, these rate reductions are temporary. So make sure to read the fine print carefully and be financially prepared for the day when your interest rate might increase again.
Your loan can be extended for a longer period which will result in lower monthly payments. This option is also referred to as “re-amortization.” But extended payment periods usually result in higher interest costs overall since you’re paying interest across more months. Ultimately, you could end up paying more for your mortgage than you were initially going to pay.
- Fixed-Rate Loan
You can always switch to a fixed-rate loan if your adjustable-rate mortgage is becoming unaffordable.
- Postponed Payments
You may be able to temporarily pause mortgage payments if you’re between jobs but know that you have a paycheck coming or if you have surprise medical expenses that you know will be paid off. Postponed payments are also referred to as a “forbearance agreement.” The only catch, you’ll have to make up the missed payments at some point. The lender usually adds them to the end of your loan, so it may take a few extra months to pay off your debt.
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This is a viable option, however, you can’t actually refinance your house when you owe more money than it is worth. Most lenders don’t allow traditional refinancing until you have at least 20% equity in your property. So if you haven’t built up enough equity to qualify, you’ll have to consider other alternatives.
Should You File for Bankruptcy?
Filing for bankruptcy should be considered as a last resort option. Declaring bankruptcy or dealing with a foreclosure can take a huge emotional toll on you and your family. Filing Chapter 7 or Chapter 13 bankruptcy should only be pursued if you have tried everything else. Emphasis on everything else. This may appear to be an easy way out of your financial hardships, but it truly isn’t.
There are two chapters of bankruptcy you can file for in this particular situation. Here is an overview of each option:
Chapter 13 Bankruptcy
In this chapter of bankruptcy, the court puts a plan in place to repay some or all of your debts. You’ll have some time to work on getting your mortgage current. The court monitors your budget, and your repayment plan will typically last for three to five years. This chapter of bankruptcy can be on your credit report for up to seven years.
Chapter 7 Bankruptcy
In this chapter of bankruptcy, all or most of your assets will be sold by the court to repay outstanding debts. By filing Chapter 7 bankruptcy, you could possibly lose your house, cars, and other assets. But any remaining debt is forgiven. The only catch this chapter of bankruptcy can stay on your credit report for ten years.
Filing for bankruptcy is a serious decision that can prove to be expensive, emotional, and exhausting. And as you’ve learned, the consequences will be on your credit for several years. Only consider this option if you’ve tried every other possible solution.
So you’re probably wondering, “what should I do with an upside-down house?” There are several options for you to hold onto the place, but you may have to make drastic changes to your finances.
Another solution would be to sell your house. However, it may take a while to officially sell in a short sale and may include realtor commissions, reducing your profits even more. So if selling an upside-down house is the route you’d like to take, selling to a local home buyer would be really helpful to avoid months of uncertainty and costly commissions.
Being upside down on a house can be a stressful and overwhelming situation for anybody, just remember there are available options, and you can get through this!