Lose your house, lose your down payment?

[Anonymous]

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@Anonymous wrote:

As for equity, no you don't automatically forfeit it.  If the foreclosure sale generates more money than the loan balance and fees, you get the difference as your equity.  If the home has appreciated over the years (like normal, not right now) then you are also protected partially by that.

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This would only be the case if the home sells at the foreclosure sale/auction, which most homes do not in the current credit climate. If it does not sell and then becomes REO property, you lose your investment in the home.

[SanDiegoEngineer]

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@FicoPower wrote:
Isn't that the biggest risk in the world?  Also, do they only foreclose on you are three months of nonpayment?  I just think it is scary to think that 10+ years from now if you are always on time and something horrible happens, you can lose your house and savings.  All of my life unexpected things have happened that I tried to work very hard to get over but eventually the inevitable happened.  So it has reached a point where I am just waiting for bad things to happen.

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Bear in mind that in a normal housing market, if you've owned your house for 10 years (especially with a 20% down payment), and a financial calamity strikes, you should have no problem selling that house for a reasonably substantial profit.

In a normal market, houses appreciate at roughly the rate of wage inflation, which is generally about 3-4% per year.  The recent housing bubble was anything but normal - if someone bought at the very peak in 2005-2006, because of the enormous size of the bubble, they may very well be underwater for 10 years or more, but this is historically unprecedented.  If you buy in a normal market, with 20% down, historically you will never be underwater, and between principal payments on the loan and normal house price appreciation, you should be able to sell that house for a reasonable profit relatively soon after purchasing the house.

Here's an example:

Buy a house at 100K (to make things simple), with a 20K down payment (80K mortgage).

After 5 years, house has appreciated to being worth $119K, and you've paid down about 7K of the initial loan balance, leaving you owing 73K.  Suddenly you lose your job, and have to sell the house.  Your transaction costs (listing fees, commissions, etc) come to about 10% of the sales price, and you sell at fair market value of 119K, so transaction fees are about $12K. 

Selling price:  119K

Less transaction fees:  12K

Less mortgage balance: 73K

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Cash to seller:  34K

So you were able to extract your entire downpayment, all the principal you paid, and 7K in housing appreciation, all within 5 years after buying the house.

As I pointed out, this is an example in a "normal" market.  I think we're rapidly returning to a point where these rules will hold true once again, but if you bought at the latest bubble peak, and have been hit with the 30-50% depreciation some areas have, it could easily take 15 years for "normal" appreciation to return the home to it's former value.

Message Edited by SanDiegoEngineer on 05-06-2009 10:26 AM

[Anonymous]

We lost our house about 3½ years ago after my husband was out of work for an extended period of time.

We've rented since then and are currently on pins and needles waiting for underwriter approval to purchase another home.

Our mortgage payment with taxes and insurance will be roughly the same as what we're paying for rent. That's just the beginning though. Most of that payment in the first years will be tax deductible - we'll be able to reduce our withholding by at least $200 a month. And while the taxes and insurance may increase a bit over the years, the bulk of the payment will be fixed. I guarantee you we'll be paying less 20 years from now than we would at that time if we were renting. Plus, most people are able to completely pay off their home by the time they retire, after which they only have to maintain the insurance and taxes. You can either sell the house and downsize with cash in hand, or continue to live in the home as long as you're able.

With the first time homebuyer's tax credit this year, you can put 3.5% down on a $200,000 home... and get the entire downpayment back from the government. How's that for cutting down on your risk? Negotiate with the seller to pay your closing costs and your savings will go right back to where they were when you started.

You do have maintenance costs as a homeowner that you don't as a renter, but you also have the security of knowing that you can live there for as long as you want and decorate it to suit you. My daughter is already planning the "castle wall" motif she's going to paint in her new bedroom. Homeownership isn't for everyone, but having experienced both I can't imagine renting indefinitely.

[Anonymous]

Best of luck, deemac. Great post.

[Anonymous]

Thanks! The file is in que at the underwriter's and our LO says "don't be nervous" (hah!)

We're hoping to move Memorial Day weekend.

[Anonymous]

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@Anonymous wrote:

Thanks! The file is in que at the underwriter's and our LO says "don't be nervous" (hah!)

We're hoping to move Memorial Day weekend.

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Don't be nervous. Uh, okay...sure!

[Anonymous]

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@Anonymous wrote:

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@Anonymous wrote:

As for equity, no you don't automatically forfeit it.  If the foreclosure sale generates more money than the loan balance and fees, you get the difference as your equity.  If the home has appreciated over the years (like normal, not right now) then you are also protected partially by that.

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This would only be the case if the home sells at the foreclosure sale/auction, which most homes do not in the current credit climate. If it does not sell and then becomes REO property, you lose your investment in the home.

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Well, that is basically correct, in that if there are no bidders or none at a level satisfactory to the lender, the lender buys the home for the balance amount.  If there were bidders at higher levels, the difference goes to the homeowner. 

My point was that it is not "automatic" forfeiture.  In fact, if the home sold for less you could be liable for deficiency.  After all you borrowed a sum of money, not a house.  The lender wants the money back, not the house.

Message Edited by txjohn on 05-06-2009 05:33 PM

[Anonymous]

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@Anonymous wrote:

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@Anonymous wrote:

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@Anonymous wrote:

As for equity, no you don't automatically forfeit it.  If the foreclosure sale generates more money than the loan balance and fees, you get the difference as your equity.  If the home has appreciated over the years (like normal, not right now) then you are also protected partially by that.

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This would only be the case if the home sells at the foreclosure sale/auction, which most homes do not in the current credit climate. If it does not sell and then becomes REO property, you lose your investment in the home.

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Well, that is basically correct, in that if there are no bidders or none at a level satisfactory to the lender, the lender buys the home for the balance amount.  If there were bidders at higher levels, the difference goes to the homeowner. 

My point was that it is not "automatic" forfeiture.  In fact, if the home sold for less you could be liable for deficiency.  After all you borrowed a sum of money, not a house.  The lender wants the money back, not the house.

Message Edited by txjohn on 05-06-2009 05:33 PM

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Another great point that totally slipped my mind. Thanks for pointing that out!

[SanDiegoEngineer]

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@Anonymous wrote:

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@Anonymous wrote:

This would only be the case if the home sells at the foreclosure sale/auction, which most homes do not in the current credit climate. If it does not sell and then becomes REO property, you lose your investment in the home.

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Well, that is basically correct, in that if there are no bidders or none at a level satisfactory to the lender, the lender buys the home for the balance amount.  If there were bidders at higher levels, the difference goes to the homeowner. 

My point was that it is not "automatic" forfeiture.  In fact, if the home sold for less you could be liable for deficiency.  After all you borrowed a sum of money, not a house.  The lender wants the money back, not the house.

Message Edited by txjohn on 05-06-2009 05:33 PM

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To a certain extent, this depends a lot on the laws of the state that you live in.

For example, in California, loans made at the time of the purchase of a house are considered to be non-recourse loans - in other words, the lender accepts that the value of the collateral put up for the loan (the house in this case) is the fair value of the loan, and the lender is ONLY entitled to the collateral if the purchaser defaults.  Therefore, if a homeowner defaults on a purchase money loan in California, the bank cannot legally come after the homeowner for any deficiency judgement if the house sells at a foreclosure auction for less than the mortgage amount.

This does not apply to refinances, heloc's, etc. which are entered into after the purchase of the home in California - those loans are considered to be recourse loans, and the bank can come after the homeowner for a deficiency judgement in those cases.  This also may or may not apply to short sales - some short sale contracts in the fine print are attempting to turn the non-recourse purchase money loan into a recourse loan as a consequence of the lender accepting the short sale, though I'd expect there to be some litigation in the future about these fine-print clauses, and I think theres a good chance that these clauses will be tossed out.