Posted in Features on April 24, 2008
Are you upside down in your home ownership? If you are, then you know that you can’t borrow from your home equity for emergencies because you don’t have equity to borrow against. You may not be able sell your home unless you come up with the money to cover the shortfall between your home’s value and your loan. In this case, either your house has lost value, or the loan balance has risen, or both.
Sitting upside down with a home ownership is stressful, but there are plenty of tips and remedies for this situation. No matter if you decide to sell, walk away or sit it out, the following list contains ideas that may help you financially and emotionally as you go through this trying time.
The list below is in no particular order. While the sites are numbered, the numbering does not indicate that we favor one site over another or that they are listed in order of value.
Get Ready to Sell
Unless you’re ready to ride out a volatile housing market, then you’re ready to sell your home. In this case, preparation for selling a home is similar to any other home sale, but the tips below are provided with empty pockets in mind.
- Limit emotional involvement: This house may have seen births, deaths, marriages and more. But, now it’s a product that must be sold. If you can’t step away from emotional perspectives, bring in a friend who can provide an unbiased perspective about what needs to be done to this “product” to make it more attractive to buyers.
- Curb appeal: Potential buyers won’t take a house seriously unless its exterior is enticing. Sometimes a little elbow grease is all that’s needed to polish up that front door, to clean the windows and gutters and to mow the lawn.
- Small stuff counts outside: New house numbers or potted plants go a long way to create an inexpensive and attractive facade. You might even borrow the potted plants.
- Small stuff counts inside: No need to replace expensive items. You might be amazed at how quickly a kitchen can change simply by replacing doorknobs on cabinets or by painting those cabinets.
- Less can be more: Sometimes the elimination of shrubs, plants, and the addition of mulch can open up a yard and make it more appealing. Once again, this effort just takes a work on your part.
- Remove furniture: Sell it, give it away or store it. Home buyers often like to envision their furniture in a new home without the obstacles of your living arrangements.
- Paint the interior smartly: If you’re painting for resale, many parents will appreciate an easy clean-up paint with a satin finish. This paint also does well if you plan to rent the house instead of selling. See if you can find what interior decorator Jeanette Fisher calls oops! paint, or paint that has been rejected by potential buyers to save a few dollars on this renovation.
- Hold a yard sale: If your neighborhood is conducive to yard sales, use this opportunity to clear out the house, make money, and to tell people the home is for sale.
- Use consignment shops: Or, thrift shops or second-hand to sell items you don’t need.
- Go secondhand: Nothing can beat a dishwasher, stove, sink, pot rack, pantry door, and four cabinet units used for $435. Just ask Frugal Babe about that deal.
- Spruce up the siding [PDF]: Siding replacement hangs in right up there with kitchen and bath remodeling for home sale ROI (return on investment). If all you need is new siding to make your home stand out for sale, then go for it. Otherwise, just spend the money on a power wash to make that home seem like new.
- Don’t overspend: Don’t run up those credit cards to overspend on a home to make it the best in the neighborhood. Buyers will not overspend on you, so why should you overspend on them?
- Be frugal: You can have every thing you need to fix up that home for sale if you’re frugal. If frugality is a new lifestyle for you, check out frugal Web sites such as this one to learn how to ready your home for sale for mere pennies.
FSBO in a Down Market
The ability to sell your home without the expertise of a Realtor is the goal for many homeowners. Here are a few tips for the FSBO (fizber) homeowner that can help to sell that home in a down market.
- Learn how to sell your home: Even if you end up with a real estate agent in the end, learning how the home sale process works can only help you understand the process and save money in the long run.
- You might not have a choice: If you’re upside-down in your home and you need to sell, you may need to forgo a real estate agent. No equity means no 5-7 percent commission for a broker.
- Build commission into sale price: Money that would otherwise be paid to a real estate agent can be built into the asking price, offering the home seller greater flexibility for bidding. In many markets, this can mean the difference between a property sitting on a market and being sold.
- Be prepared legally: You’ll need appropriate paperwork for FSBO transactions. Either consult a real estate attorney or look through FSBO sites on the Internet to learn what you need and why you need it. Realize that many forms are state specific.
- Go about FSBO safely: Often the real estate agent provides a buffer zone between seller and buyer. This article provides some great advice on how to sell your home safely on your own.
- No foreclosures in neighborhood?: You might want to tout the fact that there are no foreclosures in your neighborhood. People want to avoid “suburban slums,” the moniker that now tags many foreclosure neighborhoods.
- Learn about MLS: The MLS (Multiple Listing Service) is the primary data system that most real estate agents use to market and sell property. 75% of all properties sold across the nation are sold through the MLS. The two tips below show how you can gain access to this powerful selling tool.
- Join FSBO Web sites: Sites such as this one and others linked here can help you gain a footing in your home sale, especially for Multiple Listing Service (MLS), tips, and FSBO education.
- Go MLS all the way: You can bypass joining FSBO sites and on-site advertising fees by going straight MLS. This service still costs, but you can avoid paying a listing commission in many cases. The site linked here provides just one example of how you can go about this process, and this site provides yet another alternative. Weigh all options before spending money, and read all material to familiarize yourself with the process.
- Research your options: Use the Web 2.0 real estate sites listed here to discover your home’s approximate worth and other scenarios before you make a move. You may discover options that will help you sell your home faster and with less cost.
Dealing with Realtors
Sure, you may have dealt with a Realtor or two when you purchased your home, but times may not have been what they are now. A rough market can change attitudes and your risks.
- Learn about the ins and outs: Although this Wired article is dated 2005, the information contained in its perspective is just as relevant in 2008. In a down market, you can assure yourself that agents will want to push harder and faster to get your house sold so they can make that commission. While this may be what you want, a little less ‘fear factor’ could help you realize patience and more money down the road. Dealing with realtors is daunting, but don’t feel the need to start looking at Capella University reviews or applying to real estate degree programs — just check out this easy to digest guide, instead.
- Cut paperwork expense: Even if you decide to use a real estate agent to sell your home, you might find you can cut down on the paperwork fees by doing some legwork yourself. Learn more about what you can do to cut those costs online.
- Learn about buyer, seller, and duel agents: The duel agent may save you money (see directly below), and a seller - only agent will try to get you the best price. Either way, be sure to know who your agent really represents.
- Send potential buyers to your (duel) agent: As a buyer, the ability to use the seller’s agent may benefit all concerned, since the buyer eliminates one agent’s commission at no cost to you. That’s a hefty incentive to buy your home.
- Beware discount brokers: Not that discount brokers are “bad” - it’s just that they may not share your incentive to sell your home.
- Consult a Realtor for a remodel: If you can stay put and improve your home for sale down the road, include a Realtor in your plans. Often, Realtors can provide great advice on what to remodel and how far to go for your neighborhood, saving you plenty of money in the long run (see “Weather It Out” and “Invest in Your Home” categories listed below).
- You don’t need a Realtor for auction: If you want to try to sell your home quickly, you don’t need a Realtor to put it up for auction. You have options as well, such as refusing a bid or setting a reserve.
- Maybe you need an agent: If you’re so stressed out that you can’t handle calls, set appointments to see your home or show your home. This blog entry, not written by a Realtor, can provide you with several reasons to use a Realtor.
A home loan refinance is a new loan obtained through your lender or a new lender to pay off existing loan. If you’re upside-down, however, your best recourse is to try to change the terms of your mortgage.
- Be a Vanilla Borrower: If see personal financial troubles looming on the horizon, but if you currently have good credit, good income, low debt, and strong assets, then refinance now if you need it. You’re what is known as a “vanilla borrower,” and you may have an easier time refinancing now than later.
- Refinance for a lower interest rate: Take advantage of lower interest rates for refinancing, but only if it makes sense in the long run. The trick is to know how long you intend to stay in your home.
- Research your options: Refinancing involves many of the same steps as the original mortgage financing, along with expenses for an inspection and an appraisal. Crunch numbers to see if refinancing makes sense for you.
- Then again, banks are skittish: Mortgage rates are rising, despite federal cuts on interest rates. Rising mortgage rates tend to keep buyers away, and it makes it more difficult for homeowners to refinance.
- Forget the Cash Out refinancing option: If you’re upside-down in your home, this option isn’t available. Without appreciation and with debt on mortgage, you’ll see more debt instead of money in your pocket.
- Don’t call a national lending assocation: Outside some of the problems listed here at Consumer Affairs, these companies can assign your input to mortgage companies around the nation, and many of those companies will take that information and query your credit report to qualify you for business. This mass attack on your credit report translates to a lower rating for all the queries. Instead, look to your previous lender or find someone through a friend who has had similar experiences and leave your credit report alone.
- Another reasong to stay with your existing lender: If your credit rating has slipped, a previous good credit rating is known to this lender. They may be willing to cut some fees to help you refinance with them.
- Beware of other options: On the other hand, be leery of options that provide seeming relief, as they have negative as well as positive sides to each issue. In this case, a government-backed guarantee to lenders who are willing to refinance upside-down homeowners might be fraught with problems.
- The critical factor for refinancing is the appraisal: Learn how the appraisal can make or break a refinancing deal.
- Get a fixed rate mortgage: If you have an ARM (Adjustable Rate Mortgage), then you know you don’t want to go there again. Instead, refinance to go after a fixed rate mortgage, one that won’t change on you no matter how long you own your home.
- Trust your gut instincts: If, as this blogger says, you find no light in the eyes of your lender or any other person you deal with, perhaps you should wait before you make another financial decision.
Foreclosure is a black hole that keeps on draining you long after you’ve lost the house. No matter how bleak things may seem, there are many ways to avoid foreclosure and to save your credit rating:
- Don’t live beyond your means: A story at Dr. Housing Bubble shows how easily and quickly a well-off couple can face foreclosure, thanks to overspending - even on a $130,000 gross budget.
- Contact your lender immediately: Contact your lender before you hit the figurative brick wall. Your lender might have solutions for you that are specific to your state or region, and that lender would rather help you out than see you walk away.
- Don’t ignore correspondence: Although you might think it’s all bad news, your lender and others may be trying to help you. Open and respond to all correspondence.
- Learn about foreclosure laws: Foreclosure laws vary from state to state. This is your resource to learn more about your local laws.
- Know your rights: You have rights as a homeowner. Read your mortgage and seek counseling. These rights vary state by state and new legislation may alter what you know already.
- Seek independent counseling: The U.S. Department of Housing and Urban Development (HUD) keeps a state-by-state list of certified housing counselors on its Web site.
- Learn about mortgage fraud: Although it may be a bit late to learn if you’ve been duped, you may have recourse or assistance available to you. Look through blogs or news services like this one to learn more about mortgage fraud and cases in your area.
- Talk with a lawyer: Many lawyers will offer a free initial counsel to hear you out. These lawyers can help you make informed decisions, especially if you’ve been wronged in your mortgage setup.
- Try a short sale: A short sale is a process by which you can sell your home for less money than you owe on it. Although still not a common way to avoid foreclosure, the short sale can work if the mortgage company is willing and your buyer is committed. Just know that the short sale may result in a 1099 that shows the debt forgiveness (this would translate to taxable income for you).
- Learn about loss mitigation programs: Several programs exist that can help you forestall foreclosure. Some programs may require that you qualify with various standards, but the options do exist to help you keep your home and your credit rating.
- Avoid foreclosure rescue scams: Various scams, including equity skimming, phony counseling agencies and more are there to take your house and the rest of your money. Use government agencies, legitimate banks and other companies to learn what you can do to protect your assets.
- Learn about Hope Now: If your lender won’t talk to you because you’re upside down, read more about Hope Now to discover other options. This program was instituted by the Bush administration in 2007 to help homeowners avoid foreclosure.
- Don’t move: In order to qualify for assistance, homeowners often are required to be living in their home.
- It’s illegal in California: Do not let anyone charge you an upfront fee for foreclosure advice and assistance. Instead, seek counseling and talk with your lender.
When you try to avoid foreclosure, you try to save your credit rating as well as your house. Avoiding bankruptcy is a different animal altogether…
- Don’t lose it all: If you don’t declare bankruptcy, then you can keep many things - like furniture, credit cards and more. If you decide to declare bankruptcy for debt relief and you own a home, other opportunities exist.
- Think rationally: Both bankruptcy and foreclosure stay on your record for years. However, it’s easier to rebuild your credit when you still have credit cards in hand.
- File Chapter 13: A debtor facing foreclosure can stop the foreclosure sale by filing Chapter 13, which is not bankruptcy, but a reorganization of debt.. The Chapter 13 plan permits the debtor to cure defaults on mortgage debts by repaying the arrears within a reasonable period of time.
- Beware Chapter 13: While Chapter 13 remains the only option to stop a foreclosure, you might want to know that there is a likelihood that your payoff balance will go up and that you may have limited recourse to challenge these charges if you file.
- Walk away: If you’re late on all your payments and if you have a non-recourse loan, then just walk away. You’ve already screwed your credit rating, and no one can “come after” you. Jim Cramer, for one, endorses this exit strategy.
- Before you walk away: If your property is worth less than the total amount you owe on your mortgage loan, your lender could seek a deficiency judgment. If that happens, you not only lose your home; you also would owe your lender an additional debt with the difference in what you owe and the amount the house sale price. But - this may happen only if you refinanced your home and your loan is a recourse loan (and from what we learned, this action is rarely if ever taken).
- Here, FICO! Credit scores are hurt much more by missing multiple payments - on credit cards, cars and so on - than by a single foreclosure.
- Use an attorney: Beware of companies that make walking away from your home look like it’s a walk in the park. Foreclosure is a difficult decision, and one that needs common sense and localized legal advice.
- Cash for Keys: Just like a home sale, you leave behind anything that’s attached to the house. But, if you feel like ripping out some plumbing on your way out the foreclosure door, try finding a local Cash for Keys program instead. Lenders and banks now pay homeowners hundreds or even thousands of dollars to put their anger in escrow and leave quietly.
Rent Your Home (or a portion of it)
If you can rent all or part of your home and see a way out of your tight financial situation, then why not? The list below links to information about landlord responsibilities and tax implications as well as tips on how to handle renters.
- Rent your home: If you’re in a situation where you can find a cheap place to live (like moving in with a sibling or parents), then you might think about renting your home to make ends meet on those mortgage payments. Remember to charge enough to take care of any necessary repairs.
- Rent a portion of your home: If you have a basement (or an attic or garage apartment) with an outside entrance, you might want to share your home with a renter. Learn about what you might need to make that basement rental-friendly.
- Determine your capitalization rate: Is it worth it to rent or sell your home? Learn about your options through the Forbes capitalization calculator.
- Learn how to handle renters: Learn ten great tips on how to handle renters before you rent.
- Two years out of five: That’s the rule when it comes to the IRS determining whether you were a resident at your home. If you’ve lived there for two years, then you have three years to weather out the market by renting your home.
- Personal residence tax exclusions: During those three years you can still receive the full benefit of the personal residence tax exclusion on a sale — $250,000 for a single owner and $500,000 on a joint return.
- Military fares differently: The Military Family Tax Relief Act, signed into law on November 11, 2003, allows military member homeowners to suspend this five-year period for up to 10 years of extended duty overseas or at a domestic location that is more than 50 miles from the residence that’s being sold.
- Learn how to become a landlord: If you’re thinking about renting all or part of your home, you might want to study some implications to being a landlord.
- Landlords play by state rules: If you think you might want to rent your home, learn how to play by state rules. This link provides resources for Minnesota landlords, for example.
- Rental depreciation benefits: Even if the rent covers 100% of your out of pocket expenses, you may be able to take deductions. The loss will come from the depreciation on the rented portion of the house.
- Learn more about tax benefits: For taxpayers in general, rental losses are limited to $25,000 (filing as single or married filing jointly; it’s only $12,500 for married filing separately), regardless of the loss amount. But when your income is over $100,000, your deductible losses are reduced by $1 for every $2 of income. At $150,000, you are totally phased out of the rental loss deduction.
- Be an active participant: You are apt to lose the right to that $25,000 loss when you turn your home over to a property manager to rent, manage and maintain.
- Report your income: On the down side, rental income is considered just that - income. You must report this money on your tax return.
Weather it Out
If you still have a job and if you can make your mortgage payments, then why worry? Just keep an eye on the markets and your neighborhood to learn how the markets may affect you in the future…
- Patience is a virtue: If you can sit out this current economic free fall, then do so. Otherwise, you may be lowballing a home that could be worth much more in a better market economy. After all, if Bernanke’s hands are tied, perhaps your hands are tied as well…
- Don’t sweat the equity: As with a stock market portfolio, the value of your home will rise and fall with the markets. If you’re upside down now, that situation may change within months depending upon market movements. Sitting tight only means that you’re a long-term investor in your home and that you need to have faith in your choice.
- Your neighbors may hurt you: Another reason to sit out the down market is to determine if your neighbors are foreclosing. If so, the market value on your home may have plumeted and it may be difficult to sell - at least for now.
- Keep an eye on new legislation: Lawmakers want to help homeowners, as a bad housing market affects the entire country’s economy. Keep an eye on legislation such as this one in Michigan that can help you now or down the road.
- Watch the stock market: Some good companies are taking a beating thanks to the housing slump. If you have the means, do some research and find stocks that will increase along with your house property as the country climbs out of this financial fiasco.
- Pay on your principle: If you have extra cash, you might want to avoid a volatile stock market. Instead, pay more on your home’s principle to help bring your upside-down mortgage right-side up.
- Reduce credit card debt: If the interest rate on your credit cards is more than your mortgage rate, then pay off those cards. This is one step in bankruptcy avoidance. Learn more from blogs like Blogging Away Debt.
- Search for accurate pundits: While you’re twiddling your thumbs waiting for the housing slump to end, search for pundits (like Tamara J. Erickson) who predicted this situation over a year ago. Maybe these are the analysts you need to follow in the future…
- Recession-proof your career: Why lose your job when your mortgage is upside down? Not a good idea, right? Learn how to make your career recession-proof. Maybe that will take your mind off your lack of equity.
- 11 Recessions since WWII: It’s a cycle. If you can sit this one out, then position yourself for profit on the upswing.
- Four years? Maybe five? Some pundits put recovery somewhere around 2011. Can you hold onto your property that long? If so, maybe you’ll need to do a little renovating to get your house up to speed…
Invest In Your Home
Many investors believe that the best place to put investment dollars these days is into a home, because that’s where they’re gambling the most equity will accrue even with this mortgage crises. If you’re in a position to weather out this financial storm, then think about what will make your home worth more down the road. Here are some suggestions:
- Don’t expect refinancing for remodeling: You’ll need cash on hand or adequate credit for these projects, as it will be difficult to get a bank to offer refinancing for remodeling if you’re upside down in your home.
- Look at ROI: If you have the cash or credit to spruce up your home, consider your return on investment before you lift a finger. Some projects are well worth the time and money spent. Other projects may be a waste.
- Get a second opinion: Consider your region and even your neighborhood before you assess ROI. Plus, time makes a difference - don’t remodel a kitchen years before you sell it, otherwise it will appear dated.
- Look around the country: A bathroom remodel might not bring as much money in New England as it would in Texas. Learn more about what improvements are bringing in more ROI at Remodeling Online.
- Major kitchen remodeling isn’t necessary: Small fixes will do. But, if you plan on living in the home for four or five more years, perhaps that those green avacado appliances can go and you can enjoy the new appliances.
- Bathrooms high on list: Next to the kitchen, bathrooms can add value to your home and will rate high on ROI. Fix current bathrooms or add one for more equity in your home.
- Add a room: Sometimes you can add a room simply by adding a closet - that small effort may change the focus of the room and add value to your home.
- Add a bedroom in the attic: Even if the housing market isn’t up, your thoughts don’t need to stay in the basement. If you can add a bedroom in your attic, you’re likely to recoup 82.7 percent of the estimated $35,000 cost of installation.
- More isn’t better: Even if you don’t lift a finger for renovation (but you should for repairs), you’ll realize a profit later. Why? Because inflation will work its wily wonders, making your home more valuable down the road than it is today.
- Think twice before you go top-dollar: Although you may love that granite countertop, think about your neighbors. Do they have granite counter tops? No? Then, perhaps the laminate they use in their homes is just as good for yours.
- Do it yourself: You can save tons of money on remodeling projects if you take the time to do the work yourself. Save electric, plumbing, and major projects for the pros, however.
- Do it for yourself: If you’re feeling down about the down market, a remodeling project may be what you need to feel good about your home and yourself again.
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