If you’ve happened upon a network news segment about residential real estate, chances are you’ve heard the terms “upside down” or “underwater” to describe the loan predicament being faced by many Americans. These terms are used to describe borrowers who owe more on their mortgage than their property is worth and as a result are having trouble selling to avoid foreclosure. But how have so many people ended up in this dilemma?
Consider the housing market in 2005. A burgeoning real estate bubble gave American’s the opportunity to purchase homes that were experiencing fast-rising prices. We purchased homes under the pretense that over time we would inevitably profit from an increase in property value that would build equity.
Fast forward to 2008 when the front end of what would be a catastrophic residential real estate collapse became visible in the marketplace. The home you purchased for $350,000 in 2005 is suddenly worth just $190,000. But, you still owe $250,000. In short, you owe more money on your mortgage than your home is currently worth – you are “upside down” or “underwater” on your loan.
Now you are left with a mortgage that eclipses the actual price of your home and to make matters worse, the downed economy has made it difficult (if not impossible) to keep up with your loan payments. Like millions of other homeowners, you may now be faced with foreclosure. In fact, an estimated 1.7 million Americans, or 1 in every 78 homeowners, received foreclosure notices between January and June of this year; setting the pace for a record year in foreclosures.
Borrowers now have three options. 1) come up with the money someway, somehow. 2) allow the bank to foreclose on your home. 3) negotiate a “short sale”.
Option one may be the best option, but for many it is also the most unrealistic. Option two is what many homeowners dread as it invariably results in a poorer credit report (not to mention loss of the home). But what about option three? Many have never heard of a “short sale”, but at first glance, it certainly has a more appealing name than “foreclosure”. Yes, a short sale can be a beneficial alternative for underwater homeowners, but don’t be fooled; the process is not painless, nor is it as “short” as its name suggests.
Look for our next blog post to describe “short sales”: their benefits as well as their bitter irony.
