A mortgage repayment can last anywhere between 5 and 50 years. 90% of all buyers that finance their home purchases through mortgage choose the 30 years fixed-rate loan. Thirty years is a long time to pay back a loan.
The economy keeps changing, and it is unlikely that everything will remain the same during the duration of the loan repayment period. Having negative equity on your house can occur regardless of whether you have been making payments or not.
Selling a house is a challenging process. If you have negative equity, this process will be even more difficult. However, it is possible to sell a home in Connecticut with negative equity. So, how do you do it? This guide will cover all the fine details on everything you need to know about selling a house with negative equity in Connecticut.
What is Negative Equity?
Equity on a home is the amount of your home that you own. Negative equity is when the value of a property falls below the outstanding debt on a mortgage. This fall in value means that you owe more money on your house than it is worth in the current market.
Market conditions can make it impossible to avoid negative equity. However, knowing why it happens might help you figure out the best strategy to attain positive equity again. You can find out whether you’re in negative equity by calculating the difference between the total value of your home and the money you owe on your mortgage.
For example, if you buy my house in Bristol for $300,000 with a $30,000 deposit and a $270,000 mortgage. At this particular moment, you have $30,000 equity in the house. Ideally, your equity is supposed to increase as you continue to pay the payments.
The market keeps fluctuating, so this is not always the case. If the home’s value drops to $250,000, you will be in negative equity.
What Causes Negative Equity
Negative equity occurs when the value of houses drops. Negative home equity can be caused by either a shift in the property market or lenient lending regulations. The causes include:
- A small down payment– if you put up a minimal down payment when buying your home, you will have very little equity from the beginning. If the market fluctuates slightly, you will have negative equity as you have little or no cushion to fall back on.
- Low appraisal- lenders give mortgages based on the actual value of a home. If the seller insists on selling above the appraised value and you willfully buy despite the difference in valuation. You will have negative equity when purchasing that property since you will pay more than the home’s worth.
- Market decline- if you buy a house when prices are artificially high, they will eventually come down. This drop will slash a percentage of your home value.
- Missing payments- if you miss payments, especially in the early stages of your loan, interest rates will accrue and expose you to negative equity.
- Taking high-interest loans.
Can You Sell a House with Negative Equity in Connecticut
For you to sell your house to cash home buyers in Norwalk, you need at least 10% equity in that house. This equity goes toward overdue mortgage payments and closing costs. Negative equity severely limits your options, but it is possible to sell the house. Selling the home at negative equity is known as a short sale.
It would be best if you do not short sell. Only do so if you are facing bankruptcy or foreclosure. It would help if you factor in these considerations before deciding to sell:
- Your ability to raise a deposit for your new home.
- How much negative equity do you have
- How up-to-date are you with your existing payment?
You can sell your house without having first to pay off the negative equity on your mortgage. This leeway is very considerate since you might need to move for personal reasons.
How to Sell a House with Negative Equity in Connecticut
Negative equity on a home can feel like a vicious money trap. You must understand that selling the house to companies that buy houses in Connecticut will not relieve you of your mortgage obligations. You will still need to repay the mortgage in full.
You’ll need to talk to your mortgage lender about the sale since you won’t be able to sell the property for less than the amount you owe unless you agree to pay the lender for the shortfall. If you try to sell without their knowledge, they can prevent the sale during the conveyancing process.
The financier can take you to court for failing to cover the shortfall as agreed. You have the following options if you want to sell your negative equity house in Connecticut.
House Short Sale
A short sale happens when a financier allows you to sell your home for less than the mortgage sum. It often happens when sellers find cash home buyers in Norwalk. The lender can also agree to write off the losses accrued. To execute a short sale, you must find a buyer, approach your lender, and request approval. However, your lender does not have to agree to a quick sale.
When the short sale is complete, the lender takes all the proceeds of the short sale. It might be necessary for you to make a financial contribution toward the balance depending on your circumstances. After the short sale is over, you will be relieved of your responsibility to pay any remaining balance.
Foreclosing On Your House
When a borrower defaults on the loan that secured the property, a lender can take control of the property and resell it. To recoup the cost of the defaulted debt, the lender often resells the property in a foreclosure auction.
Only the lender has the right to initiate foreclosure. Foreclosure can only happen if the borrower does not bring their loan up to date and does not currently live in the home. If you live in a house the lender desires to foreclose, they will have to evict you first.
After the foreclosure, you will not be liable for the deficiency. However, you will have awful credit, a lot of tax bills, and the arduous task of finding a new home and a job.
Paying the Remaining Balance
You could pay out of pocket or get an unsecured loan if the difference in value between your property and the existing mortgage is bearable. Before taking out a loan, make sure you obtain a reasonable rate and that you can afford the installments.
Taking out a loan will increase your debt, is likely to be more expensive than borrowing against your home, only do this if the situation is dire.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is an agreement in which you transfer the title to the lender in exchange for mortgage relief. The loan company is not obligated to accept the deed in lieu of foreclosure, but you will have to relocate in the event they do.
Your obligations to repay the mortgage are, in turn, released. Since this process is private, it will save you the trouble of going through a foreclosure in full public view.
Can You Get Out of Negative Equity in Connecticut
With proper consultations and planning, you can get out of negative equity. If you can do it, there are various options.
If you have some disposable income, you could pay off your mortgage in one single amount, but the more realistic option could be to increase the size of your monthly mortgage payment. Most mortgages enable you to make reasonable overpayments on the outstanding balance. If you make substantial periodic overpayments, you will incur early repayment penalties.
House Improvements and Renovations
A house’s condition determines part of a home’s worth. Therefore, selling a damaged house is not easy. Your home’s price will rise if you repair and maintain it regularly. A high-value home will consequently increase your equity. Improve your home whenever you get the opportunity.
Refinancing for Your House
Refinancing your mortgage is an excellent way of overcoming negative equity. You can bring down your interest rates or reduce your monthly payments by discarding your Private mortgage insurance (PMI). A refinance may decrease the length of your loan but consequently, raise your monthly obligation.
The process of refinancing into a new loan will be more difficult if you have negative equity. A lender cannot usually lend you more than the home is worth.
Owning a house with negative equity can feel like having a heavy anchor preventing you from making financial progress. Having negative equity on the home is beyond our control many times. The factors that cause it are beyond a buyer’s control most of the time.
Making uninformed decisions like ignoring interest payments can cause negative equity too. In Connecticut, negative equity makes it hard to sell or refinance your loan. If you find yourself in such a situation, follow this guide, and you will minimize the potential consequences as much as possible.
Regularly care for your house and follow up with your lender to ensure that your equity remains positive and the worth of your home remains as high as the market allows.
Contact us today if you still have any questions about selling a house with negative equity. We are here to help.