What to do when you Owe more on your House than it is Worth

This guide is written from experience. With the housing market ever changing, it isn’t uncommon for people to find themselves in the situation where they owe more money on their home than the house is worth. Although it’s tempting to give the keys to the lender and walk away, it isn’t the most responsible way of handling the debt, nor of making the most of a bad situation. Having already invested money into that home, you need to take the following steps to protect that investment in the best way possible. A home is a very expensive investment and even though the situation may look dire, there may also be a way to get through it without suffering too much loss.

Establish the value of the home

Many homeowners don’t actually know the real value of the home they have. In order to find out what the value is, professionals should be asked to give a valuation of the home in today’s real estate market. The difficulties attached to this is that an optimistic real estate agent may actually put a higher price on the property than it is worth to gain business, though a sensible real estate agent won’t do this, because there is no advantage to putting a house on the market at a price in excess of its value, since it won’t sell. Take a cross section of real estate agents and ask what the home would be worth if it was put onto the market. Then look at the results, and instead of choosing the most optimistic valuation, compare those valuations with other property for sale within your locality. Compare like to like, to establish a middle of the road valuation which is realistic.

Can you afford the repayments?

When you took out the loan on the home, your situation may have been better than it is now. Can you still afford to keep up the payments? This matters because it could mean the difference between having the home repossessed and actually keeping a vested interest. If you can easily afford the payments, then this gives you more time to decide what to do about the value of the home, and address anything which needs doing to increase that value. If you are struggling with the debt that you have, you need to decide how to go forward.

Talking to your lender is the first step, since they may be able to offer you an alternative mortgage which allows you to pay less over a longer period of time. Be careful to assess what they are offering and to balance the amount you will pay extra to that on the existing mortgage. This may give you sufficient time to rectify items around the house which affect value, and the money to deal with those items. Remember that time costs money, and you need to make a reasonable assessment of the time period involved in actually bringing the house up to its full potential value.

How much can you increase the value?

This really is something which needs to be addressed. If you make expensive repairs, will you be able to increase the value of the home sufficiently to pay for the money spent? Often putting money into a home which is already less valuable than the loan you have on it isn’t worthwhile, though in the case of the home value being determined by the state of the home, rather than the state of the market, it can be worthwhile planning to improve that home to increase the value. In this case, it is the state of repair which holds back the value, rather than the market within that given area. Talk to the experts and try and find out if spending will assist the home value.

If the potential the house may realize is being held back by repairs, you need to make a spreadsheet of what those repairs will cost, and what kind of increase in value the home would have with all of the repairs done. Try to over-estimate the cost to take into account any extras which may result from uncertainties involved in the work.

Changes in the market

Another thing you can look at is how the market in your area has changed and why. Often there are trends which are recognizable. Is the home in an up and coming area where prices will likely increase? In the case of a home which has had a lot of money invested in it, you may find that it’s worth continuing if you can see any likelihood of prices going back up again. Here, the way to find out is to look at the current market and the kinds of people moving into the area.

What does the area offer people? What puts them off buying in that area? Are amenities likely to change?

If the area looks like it is in a state is upheaval which is putting off potential purchasers, look who is investing in the area and what they are doing. A run down area which is currently being worked on may mean that it is being brought up to a more suitable standard for the market and that prices may indeed rise.

If you honestly believe that the home will not increase in value even if you continue to own it, then perhaps it’s time to look at cutting your losses and asking your lender about the possibility of a short sale. Often a lender will buy the home at a reduced price to get your bad debt off their books although this isn’t the only option. The alternative as a last resort is to ask if they would agree to a Deed in lieu. This is where the home reverts to the lender and the debt is written off. Both of these are drastic moves, but possibilities because what they actually allow you to do is to dispose of the home without having any effect on your credit score. Before signing anything, make sure that you have legal representation and that they have fully explained the implications, and your rights so that you know what you are signing. Before considering anything as drastic as giving up on that investment, it may also be possible to talk to your lender about mortgage modification, to make the payments more manageable. There are various types of mortgages that are available to borrowers and lenders are ever conscious of the fact that the market for homes is difficult and may be able to offer some hope to those not ready to give up their homes at this stage.

It really is a question of assessing the market, assessing what you are prepared to carry on spending, and what you believe your investment is worth. By talking to professionals, you are able to assess all of these elements. These help you to make a much wiser decision on whether you should move on or try your best to recoup that loss in one of the ways shown above, either by continuing with an affordable mortgage deal with your lender until prices rise, or addressing things which would add value to the home.