Selling a property with negative equity

 

Negative equity occurs when the value of your home declines to the point that your outstanding mortgage obligation exceeds the property's worth. For most homeowners, this is a rare occurrence. It should go without saying that selling a property for less than what you owe is a massive disaster.

Negative equity:

The worth of your home, less any outstanding obligations, is your equity.

Assume you took out a $450,000 loan to purchase a $500,000 home (with a $50,000 deposit). However, the property's market value has subsequently dropped to $400,000. If you still owe $430,000 on your mortgage but decide to sell the house now, you'll still owe $30,000 on loan, which you'll have to pay off.

A variety of causes may contribute to negative equity, including:

Decline house prices:

While you buy when the market is at its peak, and median home prices fall, you may end up with negative equity.

Overpaying for a property:

Overpaying is a common contributor to negative equity, whether you made an exorbitant bid to ensure you won the property or just got caught up in the excitement of an auction.

Loan-to-value ratios that are too high:

If you borrow a significant portion of the purchase price of your house, maybe %, you may find yourself in negative equity even if the value of your home does not drop much.

Selling a mortgaged property at loss:

If you have negative equity in your house yet selling a property, you must pay out your whole mortgage balance. However, you will need to get permission from your bank before the sale of your home can go through. Before enabling the sale transaction to continue, the bank will conduct several procedures.

The bank may inquire whether you have any other money available to make up the difference, such as any other savings.

The bank will also require you to complete an asset and liability statement. If you have a lot of assets, you may have to sell some of them to make up for the difference.

It's possible that bank transaction statements may be needed to demonstrate spending patterns. "If you make frequent payments for something that seems to be outside of typical expenditure, the bank may ask for further information."

If the shortfall remains, the bank will commission an independent appraisal to ensure that the property was sold for a fair and acceptable market price.

Is keeping the property a better option?

It's crucial to know if you are selling a property right now. Is it anticipated that the market will continue to decline in the future years, widening the gap between the value of your home and the amount you owe on your mortgage? Is it possible that you would be better off just hanging on to your home and waiting for the market to recover?

If you believe the value of your home will continue to decrease, selling sooner rather than later may save you money. It's easier to weather a slump if you're a property investor. Rent money from renters may help you pay down your mortgage, and you can deduct losses from your taxes. However, if you're having trouble finding renters, can only offer low rent, and aren't sure that prices will increase fast enough, you may decide that selling is still the best option.