Things are getting real ugly...

27 Replies

A close family member purchased a home back in 2007.. like so many others did. 
Things are getting ugly.. i know this, well because she is telling me. She never does this unless its very serious. 

Back then i was too young to know or care. I was 14 years old and knew nothing about anything like this.

House cost $500,000. 
Purchased on an FHA loan.
Value dropped to $300,000

Problem... $100,000 was paid as a down payment. They do not want to lose this.
What can they do, or what can I do to help?

@Mike Verrona  

Prices 40% down from the peak in today's market? This message seems couple of years too late.

What part of the country does your family member own the property in? Prices have started to go up now in last few months and in many cases prices are close to where they were at the peak of the market and it's a very competitive market with a lot of properties getting in multiple bids.

The reality is they have already lost their down payment and then some.

What's going on?  All you describe is the loss and there's nothing that can be done about that.

Assuming they borrowed $400K on a 30 year, 5% loan I estimate their loan balance at about $350K.   If they sell today for $300K they will net maybe 275K after selling costs.  They would need to bring $75K to closing to sell.

Their best course of action is probably just to stay and keep making they payments.  They thought that was OK when they bought the house.  What's changed?

So what if the house is only worth $300k now when they have a loan for $400k?  The house may be worth $700k in 10 years.  Is that a reason to bail on it? It's only a problem if they can no longer pay for it.

@Mike Verrona  

  As Jon  states you just ride it out... its the height of folly to look at what your home is worth today  and do it every day.. that is like watching your stock portfolio daily will drive you nuts.

Unless there is a default scenario then that would be different. At that price point mortgage and owning is probably greater than rent.. depending on the area. So they new that going in and they do get the benefits of tax write off...

So what is the problem aside from it being worth less than they paid for it?  Can they no longer afford the house?  Do they have to move for a job and need to sell?  If her panties are in a wad because it's worth less and she can still afford the house.  There is nothing to do about it.   Your home should never be purchased as an investment, you need a place to live and if it appreciates and you can make some money, that's great.  But it should never be the primary reason. 

You would need to look at their overall financial picture.

Any type of loan restructure, short sale, etc. the underwriter will want to see everything under a microscope to warrant a hardship and need to change existing terms.

They generally have to do it per servicing guidelines.

In this case you would have to see their PFS (personal financial statement) and liquidity versus net worth and income from businesses or their job(s). Then determine what issue specifically is bothering them. It might just be a inconvenience to them they are blowing out of proportion or a real issue that needs resolving right away.

As mentioned if they can afford the payment then they might have to ride it out long term. If they need to move somewhere else they might need to rent It out until the market recovers close enough where they can get out from under it.

If they are not moving and have a hardship they need to demonstrate that to the loan servicing company for possible relief and a reduction in interest rate and payments. Sometimes they might not qualify for the permanent long term loan change but they might give a temporary modification of the loan for 1 or 2 years etc. at a reduced interest rate and payment.

Each time these things are handled on a case by case basis so you don't know what can happen until you try.    

I love the thought process of home owners - I put $100K down and now my house is worth less than what I owe. I don't want to lose my money.

That money is GONE! Spent. Evaporated. They need to do some simple math and they'll figure it out real quick like. Well, actually, they just need to accept reality.

If they are living in the home, keep on living there. That is really the only option. I doubt a $300K home will rent for enough to cover the mortgage on a $400K loan. I've seen people make that seriously stupid mistake thinking they'll just hang on "until it goes back up." My favorite response is "You know you're throwing away money every month to protect a negative equity position, right?" Better to walk away and keep those real dollars in your pocket.

The only option that makes any sense - if they like the home and enjoy living there, forget about what it's worth. Just enjoy the home. If they need to sell, contact a local short sales specialist and make sure you're the one putting in the offer and your close family member only accepts your offer.

@Sharad M.  HI, thanks for your reply! They are in New Jersey. Bergen County to be more specific. Do you think that some of the trouble maybe their large down payment?

@Jon Holdman  Had i been a little older when they purchased i would have advised for the minimum down payment possible just to keep as much cash on hand. Not sure if that would of made a difference. 

But, what has changed is basically the income. Payments are becoming less and less easy to make. 

@Dawn Anastasi  I certainly agree with that. But, that is the exact problem. I would hate for the 100k to be down the drain. 

Originally posted by @Brian Mathews :

So what is the problem aside from it being worth less than they paid for it?  Can they no longer afford the house?  Do they have to move for a job and need to sell?  If her panties are in a wad because it's worth less and she can still afford the house.  There is nothing to do about it.   Your home should never be purchased as an investment, you need a place to live and if it appreciates and you can make some money, that's great.  But it should never be the primary reason. 

 Honestly, i wish being able to pay for the home was the case. And, that is a great way to look at it. The home was def not purchased as an investment but as a home for the family. From what I know they're backed up 4 months.  

Things are only ugly here if 1) they need to move, or 2) they are having trouble making their payments. Are either of these true? I'm only asking because people tend to get really freaked out when the appraised value on the their property drops, but in many cases that appraised value doesn't have any real impact on their day-to-day life. If they've got time to wait the "problem" may well disappear.

Hi Mike, have they had the house appraised or have gotten a Current Market Analysis from an agent to know it lost $200k in value? That's a pretty big decrease in value for Bergen County. Prices have been slowly increasing in most towns in Bergen County over the past several years.

Maybe its worth more than you think. Usually lenders won't consider modifying the loan unless there have been payments missed and their financial situation has worsened.

oh, I see I was posting at the same time as you. Is there a possibility of renting out a room/rooms to help with the payments?

Originally posted by @Jean Bolger :

oh, I see I was posting at the same time as you. Is there a possibility of renting out a room/rooms to help with the payments?

 Haha, yes that is what happened. 
The house is very spacious. But, at the same time - they have a very big family. 

Originally posted by @Kevin Hill :

Hi Mike, have they had the house appraised or have gotten a Current Market Analysis from an agent to know it lost $200k in value? That's a pretty big decrease in value for Bergen County. Prices have been slowly increasing in most towns in Bergen County over the past several years.

Maybe its worth more than you think. Usually lenders won't consider modifying the loan unless there have been payments missed and their financial situation has worsened.

 Hi Kevin, Thanks for the reply. 
I do not think they have done this lately. I will recommend it. 

They would want to do this in case they decide to sell. This way they can see how much they need to bring to the table, or potentially receive?

Yes, this way they know how much of a hit they are going to take before deciding if selling is the best option. I just ran some quick #'s, the average single family home price in Bergen County is only down 15% from 2007 to 2014. So unless the house is in rough shape, a $200k loss seems excessive.

An appraisal runs about $300. A Current Market Analysis by an agent is free. Only other option I see is renting out the house and hoping they gain some more appreciation in a few years.

Originally posted by Account Closed:

I love the thought process of home owners - I put $100K down and now my house is worth less than what I owe. I don't want to lose my money.

That money is GONE! Spent. Evaporated. They need to do some simple math and they'll figure it out real quick like. Well, actually, they just need to accept reality.

If they are living in the home, keep on living there. That is really the only option. I doubt a $300K home will rent for enough to cover the mortgage on a $400K loan. I've seen people make that seriously stupid mistake thinking they'll just hang on "until it goes back up." My favorite response is "You know you're throwing away money every month to protect a negative equity position, right?" Better to walk away and keep those real dollars in your pocket.

The only option that makes any sense - if they like the home and enjoy living there, forget about what it's worth. Just enjoy the home. If they need to sell, contact a local short sales specialist and make sure you're the one putting in the offer and your close family member only accepts your offer.

 Aaron Thanks for your response. 
From what I understand the reason the 100k was put down was to decrease the amount spent on interest. I disagree with that thought process. But, like i said at the time i had no clue what that was, and i had no say even if i did - I was 14. 

They like the home. They like the neighborhood. 

It seems like the majority of the users are advising to try and keep the home as long as possible. If i understood correctly - you are advising to do otherwise as per your quote. If i may ask why?

"Better to walk away and keep those real dollars in your pocket."

@Kevin Hill  House seems to be in good condition. One of the nicer ones on the block honestly. 

I have heard some other people suggest renting out the home. But, what would they do. Where would they go with their family? 
Or did you mean renting out a room?

They would have to rent another house at a price less than their current mortgage if they wanted to save money.

They could look into refinancing and getting their mortgage rate lower, but that might be tough if they are underwater.

Why did they use an FHA loan if they put 20% down when they bought it? FHA loans at the time only required a 3% down payment.

Again, I would get someone to find out the current market value and go from there. That will be a key factor.

Originally posted by @Mike Verrona :

 Aaron Thanks for your response. 
From what I understand the reason the 100k was put down was to decrease the amount spent on interest. I disagree with that thought process. But, like i said at the time i had no clue what that was, and i had no say even if i did - I was 14. 

They like the home. They like the neighborhood. 

It seems like the majority of the users are advising to try and keep the home as long as possible. If i understood correctly - you are advising to do otherwise as per your quote. If i may ask why?

"Better to walk away and keep those real dollars in your pocket."

Absolutely not. If they like living there, then keep paying the mortgage. They borrowed the money and agreed to pay it back. My comment was in reference to people who move out and rent it or they buy a house thinking it is an investment without understanding the risks and financing, then attempt to hang on to an upside down house, losing money every month, hoping the house will go back up in value some day so they can get their down payment back.

They could use 'recently sold homes' on zillow to get a ball park over the past 6 months on what like-sized homes sold for in their immediate area. That would be the fastest way to get an idea without having to bother a realtor. The realtor can solidify the estimate with a CMA, and then obviously money would be spent for an appraisal.

But wow, a 3-400k home LOSING value over the last 6 years...wow wow wow.

Has something happened that has made it hard for them to pay the mortgage on this house? Medical bills, job loss, divorce, required relocation? Something like that? Is it an ARM?

If they have some sort of hardship, then a loan modification might be a possibility.  Have they discussed this with the lender?

If they're really no longer in a position to make the payments, they really have only three options:

1) Sell and bring a big pot of cash to closing.  

2) Do a short sale.  That will kill their credit and may result in tax consequences.

3) Let it go to foreclosure.  Also a credit killer and also may have tax consequences.

If they're just generally over their head, can they cut back elsewhere to be able to afford this house? 

While many disagree, I think a big down payment and, even better, owning your residence free and clear is a good choice.  A house you live in isn't an investment.  Its just another expensive doo-dad, like a car or boat.  My advice is always to buy the cheapest house that meets your needs and live in it until you die.  The advice to be leveraged to the hilt in the biggest house you can afford, and a series of starter house, move up house, mini-mansion, downsizing condo in the south is an expensive myth perpetrated on us by folks who make money off selling real estate.  Oh wait, that's us.

Is it possible for you to post the address I want to see the data for that zip code.

Originally posted by @Jon Holdman :

While many disagree, I think a big down payment and, even better, owning your residence free and clear is a good choice.  A house you live in isn't an investment.  Its just another expensive doo-dad, like a car or boat.  My advice is always to buy the cheapest house that meets your needs and live in it until you die.  The advice to be leveraged to the hilt in the biggest house you can afford, and a series of starter house, move up house, mini-mansion, downsizing condo in the south is an expensive myth perpetrated on us by folks who make money off selling real estate.  Oh wait, that's us.

 This is an awesome post.  Because while it is logical and makes the most sense, almost nobody does it.  It seems like almost nobody buys a house for much less than they get approved for, and I'd venture to guess that is why 90% of people are trapped in the rat race (well, 1 reason why).  

In 2010 when we realized how cheap houses were we decided to move to our 'dream house' which was 50% of the allowed purchasing power we had.  But it was a great house still.  Since then the value has gone up about 50% and I've tried to convince the old lady we should sell it since there's so much equity in it, take the proceeds and buy a smaller house (had an area in mind) with cash since this one is more than we really need (albeit very nice), and the taxes/insurance are HALF what they are here.  So we could be going forward, at age 36, with no mortgage and a nice home paid off...but NOOOOOO!

"No way" was her response..."I love this house".  lol

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