Negative equity, or an underwater mortgage, is a situation in which the balance owed on a home mortgage is greater than the value of the house. As long as the homeowner makes the monthly payments and has no plans to move, it is not a pressing problem. Difficulties arise when the homeowner wants or needs to sell the home. Some creative solutions exist to make the sale a reality.
The term short sale is an arrangement by which the mortgage lender takes less than the full payoff value in return for marking the mortgage paid in full. The mortgage lender takes less money because most of the money is better than a foreclosure when the seller walks away from the home. The seller gets out of an underwater mortgage without enduring the foreclosure process. The seller takes the purchase price, subtracts all closing costs, and the remaining figure is the amount the lender is asked to accept. Delayed responses from lenders slow down closings but approval of the short sale solves the seller's problem.
Reduce Closing Costs
Any time a seller has negative equity he should seek to reduce or eliminate as many closing costs as possible. For example, ask the real estate agent to accept a lower commission. A partial commission is better than no commission if the house cannot close. Ask the buyer to pay closing costs normally associated with the seller such as termite inspection and deed preparation. These costs by themselves will not make the closing happen, but they will lower the amount of money the lender is asked to forgive.
Raise Sales Price
If a seller has some money, and more importantly time and talent, he can make home improvements that raise the value of the home more than the cost. For example, a homeowner who purchases new flooring on sale and installs it himself can reap some rewards. Look for inexpensive ways to make the home more energy efficient like low-flow toilets or a new water heater. The money may not seem like much but it all helps erase the negative equity.
Pay the Difference
If the negative equity is small enough, a seller may be able to pay the difference at closing. In other words, the seller has to pay money at closing to sell his home. Reducing all costs as stated before may make this option a reality even if the mortgage lender will not reduce its balance owed. For example, if the seller is $1,000 short at closing after paying all he can, a real estate agent may reduce his commission by that amount rather than lose the sale.
- Mortgage-Calc.com: How Much Are Closing Costs When You Sell Your Home?
- Homeownesinsurance: How Green Home Improvements Will Help You Sell Your House
- Consumer Financial Protection Bureau. "What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?" Accessed April 5, 2020.
- Department of Housing and Urban Development. "Let FHA Loans Help You." Accessed April 5, 2020.
- Department of Veterans Affairs. "Ten Things Most Veterans Don't Know About V.A. Loans." Accessed April 5, 2020.
- Consumer Action. "You Can Buy a Home," Page 1. Accessed April 5, 2020.
- Consumer Financial Protection Bureau. "Is There Such a Thing as a No-Cost or No-Closing Loan or Refinancing? Accessed April 5, 2020.
- U.S. News and World Report. "How Do Seller Concessions Work?" Accessed April 5, 2020.
- Nolo. "Escrow and Your Role as Home Seller." Accessed April 5, 2020.
Robert Alley has been a freelance writer since 2008. He has covered a variety of subjects, including science and sports, for various websites. He has a Bachelor of Arts in economics from North Carolina State University and a Juris Doctor from the University of South Carolina.