29 Jan Inheriting a house with an upside-down mortgage
There was a time when inheriting a house from a loved one could give you a substantial financial boost. In recent years, however, higher tax rates on inherited property and problems with the underlying mortgage have chipped away at your equity.
Inheriting a house with an upside-down mortgage can be overwhelming, but there a few ways to get yourself out of the situation.
If you inherit a house with an upside-down mortgage and want out, the most efficient way is to sell the house. On the other hand, if you would like to keep the property, refinancing or leasing to tenants may work for you. In either case, you owe more than the house is worth and you need to find a way out of the situation.
You need to get creative If you want to sell the house while protecting your credit. Common strategies for upside-down mortgages such as short sales or a deed-in-lieu get you out but will harm your credit in the process.
To walk away from the mortgage without harming your credit, you could sell the house through a subject to sale. A subject to strategy is employed by a buyer who wishes to acquire the mortgage along with its terms — closing through a subject to means that you would be free to walk away and your credit would be protected or even improved.
Is keeping the house an option for you?
Even if the mortgage was not upside-down, is making monthly payments for another house a viable option for you? Furthermore, there are pesky due-on-sale clauses which require the established loan to be paid out, in full, if the house transfers to someone other than a close relative.
Do not fret, however, for the Garn-St Germain Depository Institutions Act of 1982 was created to protects close heirs from due-on-sale clauses. In contrast, you may be required to pay off the loan if you are not a close relative to the deceased.
Refinancing out of an upside-down mortgage
Refinancing out of the situation can be possible if Freddie Mac or Fannie Mae owns the current mortgage. If you are unsure of who holds your mortgage, this link will allow you to figure it out. Keep in mind that since these are government programs, there are plenty of stipulations to qualify for assistance.
If your mortgage is not owned or backed by Freddie Mac, you may still be able to refinance out of the situation. It’s always best to contact your lender and speak with them directly before deciding which route to take.
Lease the house to tenants
Even if the mortgage is upside-down, you can still lease the property until you’re able to sell it at a profit. This option is not suggesting for most people since managing a house, along with its tenants, can become quite a nightmare.
Similarly, you could opt-in for a property management company, but their services are tailored towards landlords with many rental properties. Their cost plus the property’s upkeep could put you in a financial bind within months.
Sell the house and get out of the situation
By now you probably realized that selling the house is your best choice. When it comes to selling a property that is upside-down, some strategies will hurt you financially. For example, you could choose to walk away from the mortgage, but that would lead to foreclosure and a subsequent hit to your credit score.
Similarly, selling the house through a short sale or giving it back to the lender with a deed-in-lieu, will harm your credit for years. If you want to get out of the situation and even improve your credit score, selling the house through a subject to sale is the way to go.
Short sale the house
In short, (no pun intended) a short sale is described as selling the house for less than you owe on the mortgage. They are an excellent tool for getting homeowners out of upside-down mortgages and back on their feet.
Short selling the house means that the lender will, more often than not, take a loss on their investment. This “loss” will be reported to the credit bureaus, and your credit score will take a considerable hit. Although not as bad as a foreclosure, short sales will make applying for any type of loan more difficult for you.
Failing to pay your mortgage will always hurt your credit score. With time, the negative impact will decrease. However, it will stay on your credit report for years and raise uncomfortable questions when applying for any loan.
Failing to pay your mortgage debt in full will always have a very negative effect on your credit scores. With time, the negative impact on your credit scores will decrease. However, it will likely have at least some negative impact on your credit scores as long as it remains on your credit report.
All in all, short sales are created with the wellbeing of the lender in mind, you will get no benefit other than being able to walk away. Even if there is a profit made on the sale, it would all go towards the lender. Short sales can also take up to 6 months from beginning to end, so if you want out fast, this is probably not the solution for you.
With a deed-in-lieu, you’re giving the house back to the lender. They are one step behind a foreclosure, and many lenders will not agree to one unless a short sale has failed. Similarly to short sales, giving the property back to the lender will hurt your credit almost as much as a foreclosure.
As opposed to a short sale, a deed-in-lieu usually takes around two months to be completed. Always seek professional legal advice when considering a deed-in-lieu or a short sale. They are structured to mitigate losses for the lender, not for you.
Sell through a subject to
Selling your house through a subject to is the best way to get out of the mortgage and even improve your credit score. In simple terms, the buyer will be “subject to” the mortgage along with its terms. Once the transaction is complete, you would be able to walk away without hurting your credit.
Who would take over an upside-down mortgage, you ask? The answer is real estate investors. They regularly work with homeowners facing complex situations. A seasoned investor will be able to structure an offer that benefits not only himself but their sellers as well.
Most of the time, whether or not you should work with a real estate investor entirely depends on the situation. For example, if you own a lot of equity and the house is in decent to excellent condition, you’re better off selling through a local Realtor.
In contrast, if the house is in terrible condition and the equity you own is lackluster, selling to a real estate investor is your best option. In the case of inheriting a house with an upside-down mortgage, however, the answer is quite clear: Investors are just about the only people buying properties subject to.
Drawbacks of a subject to
By its very nature, a subject to is a double-edged sword. It’s able to get you out of the upside-down mortgage at the cost of keeping the debt under your name. In other words, if the buyer defaults, your credit would take the hit, not theirs.
That fact also happens to be the reason why investors can work with subject tos in the first place. It allows them the freedom to take on a house that is underwater (another term for an upside-down mortgage) but without assuming the debt themselves.
We’re in a time full of “weekend investors” who believe themselves to be professionals after only a few deals. Because of this, weeding out the rookies from seasoned professionals should be your top priority. It would be best if you always asked the following questions when speaking with possible investors:
- How long have you been in the business?
- Are you local?
- Do you have experience working with upside-down mortgages?
Trusting someone to take over your mortgage while you carry all of the liability should NOT be taken lightly. You’re putting your financial wellbeing in the hands of someone else, and you better be sure that person or company has your back.
Advantages of a subject to
The most significant advantage is the ability to walk away from the situation without taking a hit to your credit score. Additionally, since the debt is still under your name, you will receive the credit boost that comes with the investor making the monthly payments on the house.
Eventually, the remaining debt will be paid off, and that too would positively impact your credit. In addition, the closing process for a subject to deal is simple and to the point. If you’re working with a legitimate investor, you will pay no closing costs, they will buy the house as-is, and the entire process takes a couple of weeks.
If you find a buyer that asks you for money out-of-pocket, run the other way! They are either trying to scam you, are greedy or don’t know what they’re doing. Investors fully understand the situation in which you are in and will do their best to help you through it.
The decision is up to you
At the end the day, the choice of whether to sell or attempt refinance the house will always be yours to make. Never let a pushy investor or real estate agent steer you into signing something unless you’re not 100% comfortable with the process.
Better yet, contact your lender and speak with them about your situation. Even if they cannot directly help you, odds are they’ll give you valuable information that will allow you to make a more informed decision.