On homes and real estate: Options for underwater owners

Q. I currently own a home and am underwater on the value. If I were to sell my house and buy another, what would happen to the remaining balance that I owe?

A. In case there’s anyone left who doesn’t know what you’re talking about, “underwater” means you owe more on your mortgage than you could get by selling the house.

With some mortgages, including FHAs and VAs, a qualified buyer can take over your mortgage along with the house. That’s not likely to happen, though, if the buyer can purchase a similar house for less money and get a new mortgage at today’s lower rates.

So, nobody will buy your house if the present mortgage stays on it. It will have to be paid off. There are several possibilities:

Ÿ Perhaps your bank would agree to take whatever you can get on the open market and cancel the rest of the debt. That’s usually possible, though only if you can prove you have no other assets and are near destitute.

Ÿ Perhaps the lender would agree to a short sale, but they’d seek a judgment against you for the unpaid balance.

Ÿ Perhaps your lender wouldn’t agree to anything and you’d have to pay off the shortfall with your own funds.

Ÿ Or perhaps you’d just walk away and abandon the property, so the mortgage will go into foreclosure. Then you wouldn’t have good enough credit to get a loan on another house.

Some people who must move, due to this situation, end up holding on to the present house and renting it out. They take on the worries and risks of being landlords, hoping for enough rental income to cover the mortgage payments.

No question, it’s a difficult situation and through no fault of your own. If you don’t have to move, just hang in there. Or if you want to move, look at it this way: What you lose on your house, you’ll make up by buying someone else’s house for less than it would have cost formerly. The extra money it’ll take to pay off your present mortgage is the same as the savings you’ll make over what you would have paid for the new house a few years ago.

Q. I had to carry private mortgage insurance because I had a low down payment. I paid full premium upfront for complete coverage. In January 2011, I lost my place due to an electrical fire. My mortgage was down to much less due to extra payments I had been making.

When the insurance was placed, I was told if the building was destroyed, the mortgage would be paid. And if there was any difference, I would get the overage. Now the lender institution tells me insurance coverage descends as the mortgage decreases, and the payment will be just for the amount of the mortgage at the time of loss. Since I paid for full coverage, is this right?

A. Mortgage insurance pays off the remaining debt, which becomes smaller every month as you pay the loan down.

What you believe you were told about “overage” is a perfect example of why everything should be in writing to head off misunderstandings. Carefully read any documents you ever received about your insurance.

Q. My wife and I purchased condos before we got married in 2007. After we got married, we moved into her condo and have been renting mine out. We now want to move into a home (we just had our first baby), but I can’t imagine we are going to be able to get much of a home mortgage loan if we already have two existing mortgages.

A. When you apply for a loan to buy your own home, lenders will give you credit for the rental income that you can expect on those two condos. After all, many investors own lots of rental property and are still able to borrow on further mortgages.

Q. I’m currently looking to purchase some tax deeds on some delinquent properties in my county. What are my legal rights and abilities with property law (restitution or commandeering the property) once I do this?

A. I think you’re asking about the delinquent taxpayer’s right of redemption. Available in some states, it’s a length of time for paying off the back taxes, interest, fees, and getting the property back. If you’re going to buy tax foreclosures, tax deeds, liens or certificates — whatever they’re called in your area — you should have your own real estate attorney on tap. That’s the person who will give local information.

Ÿ Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (please include a stamped return envelope), or readers may email her at www.askedith.com.

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