A Depressed Housing Market That Could Get Worse

A Depressed Housing Market That Could Get Worse

Everyone reads the same staggering statistics every month but it only strikes home when it affects some one that you know or is close to you.  I have outlined three scenarios that are common today that spell out how bad things are.

Short Sale: A short sale in real estate occurs when the outstanding loans against a property are greater than the proceeds from the sale of home after all closing costs are paid.  This occurs only when a home owner meets the qualifications, and the home owner’s lenders agree to allow a short sale.  In the event of a short sale, a lender can release you free and clear from your mortgages and fully forgive you of any deficiency.  Many homes are sold this way due to the original buyer either not putting enough equity in the home at the time of purchase or taking out a second loan, usually a home equity loan, after purchasing the property.   As housing values fall, this leaves many home owners “under-water” on their  loans.  The home is worth less than they owe.  Sad, because the homeowner loses all the equity that he or she had in the home.

Foreclosure:  This is a legal process by which an owner’s right to a property is terminated, usually as a result of default.  Typically, this involves a forced sale of the property with the proceeds being applied to the mortgage debt.  Now if the promissory note was made with a “recourse clause” then if the sale does not bring enough to pay the existing balance of principal and fees, the mortgagee can file a claim for a deficiency of judgment.  This type of situation occurs today as homeowners lose their jobs and source of income and can no longer make their mortgage payments.  Sad again as eventually, they face eviction as they can no longer reside in the home and all their equity in the home is lost.

No sale as the result of an appraisal:  This is the saddest of the three scenarios.  A buyer purchases a home for say $270,000 with a mortgage of $220,000.  After a number of years, he or she wants to sell so they list their home in today’s depressed housing market.  The home eventually receives an offer after months on the market for $240,000 pending “mortgage approval.”  The bank comes in and appraises the home at $205,000.  In order to qualify for a fixed mortgage, the buyer must have a twenty percent  (20%) equity in the home so the bank says, “we will loan you 80% of the $205,000 or $164,000 even though you have agreed to purchase the home for $240,000.”  This leaves the buyer short $76,000 which must be paid at closing.  Naturally, the buyer does not have $76,000 to close the sale.  This is occurring more often as today’s housing market values sink and banks hedge on their appraisal values.  In the past it was usually anticipated that the bank’s appraisal would be low but, if you can take the shock, there is a web site called www.zillow.com that, unfortunately, comes close to the market worth of many of today’s homes and influences the lending for many banks.

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Written by
Donald Wittmer