Sunday, March 25, 2007

Don't Expect a Bailout if You Overpaid

The lender won't reduce the note just because values dropped and the house is worth less now.
By Jack Guttentag, Inman News
March 25, 2007

Question: After being in my house for a year, the market value is considerably less than the appraised value. I feel I was deceived by the builder and the appraiser. Who do I talk to about this?

My mortgage was for the full appraised value. I want to stay in my house, but I don't want to pay for a mortgage with a balance that is more than the house is worth. Is there any way I can get the lender to reduce my note to the real value of the house? I thought about selling, but the new appraisal is for considerably less than the mortgage balance.

Answer: You may have paid more than the house was worth at the time, as builders typically charge what the traffic will bear. There is no law against charging more than something is worth if a buyer is willing to pay it.

Being unduly influenced by an appraiser who is working for a builder is a terrible mistake, but an understandable one for a home buyer to make. It is less excusable when made by a lender, who is supposed to know better.

An alternative and perhaps more plausible explanation is that you bought when prices in your area were at their peak, paid the market price at the time and prices have since declined. Nobody is to blame for that — house prices usually rise but occasionally they drop — and you were unlucky enough to be caught.

I advise people to avoid 100% loans if they can because a price drop is always possible. If it happens, you owe more than the house is worth, making the mortgage payment a torment and a sale impossible without finding another source of cash.

The lender is not voluntarily going to share your predicament by writing down the size of the mortgage. If your house had appreciated, you wouldn't have shared the capital gain with the lender, and now that it has depreciated, the lender is not going to share the capital loss with you. Of course, if you default, the lender will indeed share your capital loss, but it will be involuntary.

Richard's notes.... If you bought your home in the last few years with 100% financing, unless you made some changes to your home to increase its value (kitchen, bathroom upgrades, etc...), its possible you might be at a loss if you sell now.

Don't panic! I suggest you first contact a local real estate professional who will look at your home and provide a comparable market analysis which will detail whats available, pending, and sold near your home. But keep in mind your house is worth what the market will pay for it.

A professional Realtor will assess your financial situation and give recommendations on what is the best coarse of action to take. Selling, refinancing, renting, short sale, etc.... You should also consult with an accountant for any tax implications when selling short.

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