Negative Equity AFfects Foreclosure

In a situation where the home owner owes an amount on mortgage which is more than the current value of the home, this results in negative equity. This often results in those cases where the value of home drops sharply immediately after the mortgage has been taken. Due to this the home owner does not have much time to pay for their mortgage hence resulting in an upside down or negative equity arrangement. This scenario is the leading cause of foreclosure but its seen that lenders do not like foreclosing on negative equity homes.

How Negative Equity Leads to Foreclosure

In the case as mentioned above, if an individual owes more for his mortgage than compared to the value of the home then it’s obvious that taking the mortgage wasn’t beneficial for the individual.

There are two aspects to this, one is that the borrower only makes payments for the monthly installments and does not cover the amount owed on the principle amount. Secondly other homes are financed with sub prime mortgages, this means that loans are provided at the prime rate and then adjusted to a very high interest. Besides these criteria it could also be possible that that the home was over valued at the time of purchase.

If  any of the circumstances mentioned above occur then it’s obvious that the borrower would want out of the mortgage deal. If they decide to sell the house then that would not make things better as the cost of the house might be covered by the amount owed on the mortgage would not be covered. In this situation, refinancing might be an option but if the borrower has a bad credit score then they might not receive that loan. Therefore many borrowers will mostly opt to stop making mortgage payments and look for short sale opportunity while other might prefer going for the foreclosure.

Why Lenders Don’t Like Negative Equity

Most borrowers do not like the process of foreclosure, the main reason for this is loss of value which they will have to bear. Had the borrower paid the full amount for the mortgage then it would have been a benefit. No one would like to sell their home for a lower value than what they had paid to purchase it. Apart from the purchase value, the additional value would also include the mortgage being paid hence the final cost rises. A person would at least keep a target in mind to break even which would save them from incurring a loss.

How Regulators may Resolve the Situation

Regulators help you by purchasing the home out foreclosure. For this they issue the original lender a certificate of negative equity. Under this process the home owner has to make payments to the FHA or to the government regulator. These payments are lower because the government will be willing to refinance the loan to qualified buyers. In the end if the government is able to sell the home at a higher rate or foreclose it then the original lender will present the negative equity certificate to collect the funds in the lost deal.

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