DEAR BERNICE: Our house has been on the market for almost six months and we’ve had only one showing. It shows like a model and is in perfect condition. We listed with the top agent in the area who has a stellar record. Our list price is actually under what the comparable sales suggest, even though we updated the entire house just two years ago. We just lowered the price again from $899,000 to $799,000 and still no showings. Even if we were to close the deal at $799,000, we will still have to come up with another $75,000 of our own money to pay off the existing loans. What can we do? –Tom D.
DEAR TOM: Sadly, this is a story that millions of homeowners are facing throughout the country. It’s particularly difficult for anyone who lives in an area where property values skyrocketed. These properties, due to their increased valuation, no longer qualify for what is known as a "conforming loan." Any borrower who needs a loan higher than the conforming loan rates for your location will have an extremely difficult time obtaining financing. In most cases, the maximum loan that you can obtain in the continental United States is $729,750. You can determine the exact loan limit for your particular property address here after registering at Fannie Mae’s Web site.
To illustrate how difficult it is to obtain jumbo financing in today’s market, one loan officer had more than 200 applications from his bank’s top-tier customers. (A jumbo loan is one that exceeds the maximum amount allowed for conforming loans.) His institution only willing to fund only 15 of these loans, and these were for their very best customers!
The challenge is that with the meltdown of the financial system, lenders could no longer make loans, bundle the loans together, and then sell them to other investors. (These investors included pension funds, hedge funds, or a number of other financial entities. As a group, this is known as the "secondary" market.)
The reason the conforming loan market is still active is that Freddie Mac, Fannie Mae and the Federal Housing Administration (FHA) provide a means for lenders to make loans and sell them on the secondary market. If a lender cannot resell the loan, that means they must put it in their own portfolio. "Portfolio" loans are funded from the deposits the lender has at their institution. The lack of a secondary market for jumbo loans has made selling more expensive properties exceedingly difficult.
So what are your options if you can’t sell? …CONTINUED
1. Carry part of the financing
In terms of your situation, if you had equity in your property, you could offer to carry a second trust deed for the amount that your buyer would need over the conforming loan amount for your area.
2. Stay put
Since you appear to owe more than the property is worth, you may be eligible for a short sale. To qualify for a short sale, however, you must be able to demonstrate financial hardship. Since you appear to have additional funds to close the transaction, a short sale may not be an option. Consequently, the best move may be to take your property off the market and stay put until the market improves. This is also one of the best ways to protect your credit.
3. Rent it
If you must move, you could lease your property. While this may not cover all of your payments, it does buy you time. Once your property becomes a rental, you risk losing your homeowner tax exemption of $250,000 (for singles) or $500,000 (for couples). On the other hand, rental properties can be exchanged for other types of investments and can also generate losses against other categories of income. Only a tax professional can accurately determine what the tax consequences of this decision would be. Be sure to discuss how long you can rent the property before it changes from being a personal residence to a rental, as separate rules apply.
Lease-options are tricky but do provide another way to solve your dilemma. In a lease-option you negotiate two separate transactions. The first transaction is a lease agreement. The lessee (the person leasing your property) signs a normal rental agreement, gives you a security deposit, and pays you rent. The second part of the transaction is the actual option and sale agreement. Both parties must sign a separate purchase contract. In most cases, it’s smart to have all the inspections and other due diligence completed prior to the person taking possession of the property. You will also need an option agreement drafted by an attorney, not your agent. The only exception is that some Realtor associations have approved lease-option agreements for their members to use. In the option agreement, the buyer agrees to pay you a predetermined amount of money for the right to purchase your property at an agreed-upon price at a later date. If the person does not exercise the option, you get to keep the option money.
The good news is that there are some signs that the jumbo loan market is beginning to improve. Let’s hope that the improvement comes sooner rather than later.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
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