Think you have equity in your home? Think again

Recently I have come across several homeowners who are interested in selling their home. When trying to calculate a homeowners net proceeds, an important component is figuring out the current mortgage balance. So of course the question is asked, "What is your current mortgage balance?" As a real estate professional, we realize the mortgage balance is different from the actual loan payoff figure. But the mortgage balance will give us a general idea of where we're working from. But that is where the problem can sometimes start. Here is an example.

 

A homeowner will tell me they have a mortgage balance of $100,000. The homes in the area are selling for $175,000. In a normal situation that Seller would have equity in their home...or so they think. Upon doing further research I can see they purchased the home originally for more than $200,000 with putting very little, if any, money down. So when prompted for an explanation on how they owe so much less than my research indicates, it's at this point they explain they did a loan modification. The Sellers explain to me that their bank previously modified their loan via a principal reduction. And herein lies the problem.

 

The homeowners are given what they believe to be a true principal reduction of $100,000. They are understanding that to mean they no longer owe the $100,000. Using the example above here is the true situation: A $100,000 "principal reduction" is given. However it is more of a silent second mortgage. The homeowners current balance at the time of the loan modification was $200,000. So the $100,000 "reduction" is given. The homeowners payments are adjusted to reflect payments on a $100,000 loan balance. Their interest payments are also recalculated off of a $100,000 loan balance. So the homeowner thinks they now have instant equity. However, the modification documents state (on the last page of their agreement) that the $100,000 will be due when a homeowner sells their home down the road. So in the example above, the Seller thinks they have $75,000 in equity, but in fact are still upside down by $25,000. Making it impossible to sell their home, without having to pay out-of-pocket.

 

So if you are a homeowner who is considering selling their home, and previously completed a "principal reduction" modification, please make sure you review your documents prior to listing your home. It's best to review any loan modification documents with a legal advisor first. However you'll always want to make sure you consult with a trusted, experienced real estate advisor too. Curious to know the value of your Arizona home? Visit my website at www.helpingazhomesellers.com for an easy-to-use home profit calculator that will give you instant value results.