My home has lost value due to the real estate market. I need to refinance in a couple years, before my interest rate adjusts, but I feel the value will not be what I paid for it. How can I refinance into a fixed rate without having to come up with the money to meet the LTV ratio of a lender? I don't want to lose the home but if the lender gives me no alternative I guess I will have to.
Many Americans face the same financial difficulties you face. Many borrowers with less than perfect credit took out sub-prime loans that had a fixed interest rate for a few years, then were set to adjust.
These loans were sold to you and others with the assurance that it would be easy to refinance. Often, borrowers were told that paying on the loan for the first few years would be a 'band-aid' that would help improve their credit to the point that the next refinance loan would be a prime loan at the lowest interest rates available.
Unfortunately, another assumption that was not discussed much was that home values would keep rising. After all, they had been going steadily upward for years. Instead, home values have plummeted, leaving many borrowers owing more on their homes than the homes are worth, and finding out that refinancing without equity is a big problem.
Refinancing without equity is very difficult. Few lenders offer loans above 90% of your home's current, fair-market value. Theoretically, one could pay down the loan balance, but who has that kind of money? The credit market has tightened up. The days of 100% refinancing have disappeared, even for borrowers with excellent credit and strong income. Most lenders will not lend more than 90% on a refinance loan and some cap the loan amount at 85% or 80% of your home's value.
There are a few options for borrowers who seek refinancing without equity:
If you are not able to refinance your loan, what steps you take depend a lot on whether or not you can afford to make your mortgage payment. If your income has dropped or if your loan payment adjusted upwards, when you can't make your mortgage payment, you are left with only a few options, none of them excellent.
Please read the Bills.com article that compares a short sale to a deed-in-lieu, for more information, including a discussion of the potential tax liabilities you may face.
If you can't work out a solution with your lender, you may need to consider allowing the home to go into foreclosure and then filing for bankruptcy protection, to protect yourself from collections for any deficiency balance that remains.
Before you allow your home to go into foreclosure, you should consult with an attorney in your area, to make sure you understand all the potential consequences of a foreclosure and what steps you can take to best protect yourself from those consequences. In some states, loans that were used to finance the purchase of a home are non-recourse loans. This means that the lender has no recourse to come after you for any deficiency balance. Whether your loan is a recourse loan, where the lender can come after you for the deficiency balance, or a non-recourse loan will play a big part in the choice you make.
I wish you the best of luck in finding a refinance loan that meets your needs or working out a the best solution you can.
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