Upside down mortgage?

December 28, 2009 6:07 AM

How do I know if I have an "upside down" mortgage?

Everyone says the answer is "When you owe more than your house is worth." How do I know what my house is worth? It's been on the market for four months at a certain price (suggested by the realtor) and has attracted no buyer interest. I understand "what it is worth" to be synonymous to "what someone will pay for it." We are itching to dump the house and move to a happier place (lit. and fig.), and all these news reports about strategic defaults and "walking away" are making me crazy.

For that matter, how is it strategic to default/walk away if that will fcuk up our credit for 7-10 years? It can be hard even to rent an apartment if you have bad credit, right?

Details: in PA but not Pittsburgh or Philly. FHA mortgage. House in my and my husband's name. We're 42. At the moment we have excellent credit and decent savings but a load of grad school debt (currently in unemployment deferment) in addition to the mortgage.

I know, we ought to talk to a lawyer, but I'm hoping for some helpful free advice from the hive (as ever). Thanks.

posted by scratch to work & money (16 answers total)

The "how much your house is worth" is defined by the appraised value, not what someone is willing to pay for it or what your realtor says. This is the 'value' portion of the loan-to-value ratio calculation.

If you haven't had an appraisal done, you can generally estimate this by looking at what comparable homes have sold for recently in your area.
posted by Ike_Arumba at 6:27 AM on December 28, 2009 [1 favorite]

You can check recent home sales near you on Zillow. Though local newspapers often list the info too.
posted by R. Mutt at 6:39 AM on December 28, 2009

My understanding is that "upside-down" is something that happens at the point of sale, really. Let's say you have a $100,000 mortgage, but the current market value of your home is $80,000. If you don't sell the house, you are just following the ups and downs of the real estate market -- some years, your house may be worth more than you owe, and some years it may be worth less. But, if you sell your house for $80,000 and owe $100,000, then you have no house and you still owe $20,000. At that point, you are upside-down. So, it's really a phrase that people use when they really must sell their home because they cannot make the mortgage payments. By selling at the lower price, that money goes toward the mortgage, and they still owe the balance but the payments are lower.

FWIW, I don't think it's smart to have a foreclosure unless it's absolutely necessary (that is, something unforeseeable happened that prevents you from being able to keep the financial obligation you made, and makes it necessary for the greater public to contribute).
posted by Houstonian at 6:41 AM on December 28, 2009

In addition to securing appraisals and actually fielding offers, the best way to tell what your house is worth is to look at similar houses in your area and what their selling price was. You can find this information in newspapers and on the web, and also get it from your realtor.

By defaulting are you saying declare bankruptcy? Because you can't just walk away from a mortgage, even if you're willing for your credit to take the hit. You would have to go through foreclosure and (I think) declare bankruptcy, and unless you are truly drowning in debt, that is not a good option (and you may not even be granted your bankruptcy if the court finds you are financially solvent). Bad credit makes things expensive and difficult to get what you want, but not impossible, even with a bankruptcy on your record. Still, this doesn't sound like you cannot make your current mortgage payment, you just want a change and can only afford to do so if you unload your current house, hopefully not at a loss. If you think a change will make you happy, you should do so, but not if it means seriously compromising your financial situation (which sounds decent).

Have you considered renting the house, charging enough to cover expenses, and when the housing market bounces back, then try selling again?
posted by katemcd at 6:41 AM on December 28, 2009

Yes, the house ultimately is valued as what people can sell it for (you'll want to take out the costs to sell the house), but there's also the value of the loan on the house. (note, that if you weren't looking to sell then as mentioned it would be assessed value, and unless you're looking to lower your taxes, or possibly have your bank say you need more insurance, it's probably continuing with the value it's listed from the last assessment/purchase). Look for houses similar to yours in the area, and find out what they sell for (in many/some areas in the US, there's web searchable areas of the county government with that info), and assume for safety a bit less than that. If you want to sell the house *now*, then you'll need to agressively price the house (i.e. lower), rather than chasing the market down and slowly lowering your price and never getting an offer.

If you owe 350k on your house, and no one is interested for it at $300k, and you see that comparable houses in the area sell for $250k, then it might be strategic to have poor credit than to somehow get a $110k plus loan (lawyer and RE agent costs) that it would take to be able to sell your house. If the bank(s) don't get all of they're money, they're not going to sign the deed for a sale.

If you don't have enough cash to bring to the table to close out then loan, then you'll need permission from the bank to sell it for less than you owe (a short sale, and unlikely to happen unless you've been missing enough payments that your credit is already bad), or you'll need a separate, likely unsecured, loan. If there is a big discrepancy, and/or you're got two loans on the house, it can be strategic for your time and/or the end result to just walk away. When they're two loans involved, the 2nd, usually loses all/most which can make them less than inclined to take the immediate loss.

Generally when people are talking about strategic default, it's $50k or more that's an issue instead of $3-5K.

As for renting, right now lots of houses are going up for rent, people are moving in together, and planned condos are going up as apartments. The vacancy rate in many areas is higher than normal, so renting might not be as hard with bad credit. Plus, the first place you get will likely be before the deed in lieu is on your credit, and having a good rental history and on-time rental payments will help with future renting.

on preview: one doesn't need to do forclosure/bankruptcy to get rid of the house; most mortgages have an option of "deed in lieu" which is essentially you sign off claims of the house to the bank, and they release you without coming after the remainder of fees, in exchange to not have to pay for the legal work of a forclosure. As the bank would rather you pay off the loan in full, they'll likely try to discourage this option, but read your mortgage. And a lawyer is a very good idea when talking about these amounts of money typically involved with houses.
posted by nobeagle at 6:45 AM on December 28, 2009 [3 favorites]

I understand "what it is worth" to be synonymous to "what someone will pay for it."

This is absolutely true, and is very often, if not nearly universally, misunderstood.

However, "worth" is a somewhat fluid term when it comes to real estate. If the appraised value of the house is worth less than your liability (mortgage) you have an upside down mortgage.

In order to understand this, consider the fundamental accounting equation, Assets = Liabilities + Equity.

If you have a mortgage balance of $100,000 and your house is appraised at $150,000, then you have $50,000 in equity: $150 = $100 + $50. (Liabilities are shown using their absolute value in the fundamental accounting equation.)

However, if your house is appraised at only $50,000, you still have the $100,000 mortgage (liability) and so have negative equity: $50 = $100 + (-$50).
posted by dfriedman at 6:46 AM on December 28, 2009

They'll foreclose if you just walk away, but if they don't make the mortgage back on *their* sale--and they'll sell it for less than you will, almost certainly--you're still on the hook for the rest unless you declare bankruptcy.

I would say well before you think about walking away, think about every possible small thing you can do to make your house the most desirable one people could walk into when they're looking at it, if there's even a slim chance you can price it at enough to cover what you owe. There's a lot you can do. There are even people you can hire to do it for you. If your realtor can't even get people to walk through it, try looking for a different realtor.

Yeah, it's a lot of trouble, but when you compare the trouble of bankruptcy with the trouble of keeping your house immaculate, your walks 100% free of snow, getting good pictures taken, doing minor repairs, covering all the minor details--the details are easier. This won't necessarily work for someone who bought in an absurdly expensive market that the bottom fell out of, but a lot of times it helps for slow sales around here in Ohio, and I'm guessing PA isn't that different.
posted by larkspur at 6:55 AM on December 28, 2009

how is it strategic to default/walk away if that will fcuk up our credit for 7-10 years

It's not as bad as you think. You might want to read this article which was the subject of this post on the blue last month.

Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure."

Better yet, you can default "strategically." Buy all the major items you'll need for the next couple of years -- a new car, even a new house -- just before you pull the plug on your current mortgage lender.

"Most individuals should be able to plan in advance for a few years of limited credit," White said, with minimal disruptions to their lifestyles.

Another thing to consider is that waiting for the bank to foreclose takes forever. If you were to stop paying right now it would probably be 4-6 months before you'd be forced to move out, maybe longer. During that time you are paying zero in rent. So many people are doing this right now that the bank may even pay you cash to hand over the keys and not trash the place.

Because you can't just walk away from a mortgage, even if you're willing for your credit to take the hit.

What? Of course you can just walk away at any time, and nobody is talking about declaring bankruptcy. The loan is secured by the property. It's perfectly within your rights to just stop paying at any point and turn over the property; it's only in your best interest to do that if you're underwater and can survive with a lower credit rating for a few years.
posted by Rhomboid at 7:09 AM on December 28, 2009

What? Of course you can just walk away at any time, and nobody is talking about declaring bankruptcy. The loan is secured by the property. It's perfectly within your rights to just stop paying at any point and turn over the property; it's only in your best interest to do that if you're underwater and can survive with a lower credit rating for a few years.

This varies from state to state. In particular, your advice is wrong for this poster since PA does allow the bank to get a judgment against you for what sale doesn't cover if you default.
posted by a robot made out of meat at 7:47 AM on December 28, 2009

The loan is secured by the property.

...you're still on the hook for the rest...

Larkspur's comment is important. In some states, lenders are prohibited from going after the borrower if the house doesn't sell for the remaining loan value. In other states, lenders can and will go after you. The technical term to Google for is "deficiency judgment." Before you even think about walking away, you must figure out whether it'll do you any good. If you'll still owe the money, and just be without a place to live, your situation may be much worse than it is now.

Before you actually walk away (if you end up deciding that it's the right move for you) see a lawyer to vet your plans.

IAAL, but IANYL. TINLA.
posted by spacewrench at 7:50 AM on December 28, 2009

For what it's worth, four months is not very long in the current market. We took 15 months to sell our condo in Pennsylvania last year after dropping the price a few times. We ended up making a little profit but not much. According to this site, the average time on the market in PA is 148 days (five months) so you haven't even hit that yet. You may be panicking a little early here. How good a job has your real estate agent done marketing the place? Have you had any open houses? How long was your contract with him/her, maybe you should look into another agency.

Again, don't panic.
posted by octothorpe at 8:11 AM on December 28, 2009

If you owe 350k on your house, and no one is interested for it at $300k, and you see that comparable houses in the area sell for $250k, then it might be strategic to have poor credit than to somehow get a $110k plus loan (lawyer and RE agent costs) that it would take to be able to sell your house. If the bank(s) don't get all of [their] money, they're not going to sign the deed for a sale.

This isn't completely correct. First, the banks don't sign the deed, ever. Owners of homes assign a mortgage to the bank, not a deed. When you sell a house, you need to obtain a release of the mortgage.

Second, banks will sometimes allow a debtor to do a short sale - a sale of a house for less than what would pay off the mortgage. If the mortgage is $200K and a buyer is willing to buy the house for $150K, then the seller/debtor would petition the bank for forgiveness of the $50K shortfall.

Circumstances for each short sale vary and a lender may allow one debtor to do it but not another. Usually, if the debtor has already missed several mortgage payments and is on the edge of foreclosure, then the bank has more incentive to allow a short sale. If the debtor is current on the mortgage, many banks won't allow the short sale. Essentially, the debtor/seller must show the bank that it is in the bank's best interests to allow the short sale - that the loss on the short sale will be less than what the bank would lose by foreclosing on the house.

If you are upside-down on your mortgage (a state determined by whether a buyer is willing to pay enough to settle your mortgage or not), another option might be a deed-in-lieu of foreclosure. Instead of locating a buyer, you offer to sign a deed over to the bank in consideration for forgiveness of any personal liability on the remaining mortgage balance. Again, this option usually requires that you are already in default and either in foreclosure or on the edge.

Like Spacewrench: IAAL, but IANYL and TINLA.
posted by LOLAttorney2009 at 8:36 AM on December 28, 2009

Something that stood out for me was that your asking price was 'suggested by our Realtor'.
A good Realtor will perform 'comps' and should show them to you to explain how they reached their suggested price. This is an analysis of the the market for your house, meaning homes in your neighborhood that are comparable (age, # bedrooms/baths, lot size, number of stories, etc), and what they've sold for. Recent sales (within 3 months) are usually better, especially in this market. If you didn't get this kind of analysis, ask for it. OR interview a few different agents - they're hungry right now, and you should be able to find someone willing to work for the sale.
A good agent will have a track record in your neighborhood, and will develop and share a marketing plan for your home (which, in our neck of the woods, includes a "brokers open house" before the home goes on the general market), and may also suggest ways to stage your house for sale - the great ones will even help you with this!
Also consider the timing of when your house has been on the market - typically Oct-Dec are pretty slow months (although this year that perked up a bit because of the buyers tax credit deal) - kids are in school and nearly no one wants to move during the holidays. So another suggestion is to take the house off the market for a couple of months, research some good agents and hit it again in the early spring, when the housing market typically ticks upward.
Good luck!
posted by dbmcd at 9:01 AM on December 28, 2009 [1 favorite]

Seconding what dbmcd says about "pulling comps." If your broker won't go over those with you, it doesn't augur well for his or her professionalism.
posted by Sidhedevil at 9:19 AM on December 28, 2009

A good realtor should put together a "Comparative Market Analysis" on your property. That way you can see what houses in your neighborhood have sold for (right now there is often a big difference between the selling price and asking price). If the average sales price for homes in your area is 250k but you owe 300k on your mortgage, for example, your mortgage would be considered "underwater." Honestly, your realtor should have done the CMA before even putting the house on the market. How else would he/she know how to price it competitively?

He/She can also get your the MLS listings for other houses in your area. The MLS listing sheet should have two acronyms on it: DOM and CDOM.

DOM is Days on Market (with the current realtor/agency). CDOM is Cumulative Days on Market. I would bet that if you look at the CDOM number on the other listings, many of them have been listed for much longer than 4 months. It's just how things are, especially between Nov. - Jan. No one WANTS to move during the holidays. Don't dispair - hold out until spring if you can.
posted by Ostara at 12:52 PM on December 28, 2009

Thanks to everyone for the advice. It's abundantly clear that impatience is a big part of the problem, but you've also clarified a lot of financial hoo-ha for me.
posted by scratch at 4:16 PM on December 28, 2009