Previous owner of my home wants to buy it back but the property's value is less than my loan… what to do?
I would tell the former owner that you will sell him the house for you current loan balance. He wants the home, he may be willing to pay what you owe. You can't really do a short sale unless you are behind on your payments. Banks only agree to a short sale when they think they are going to have to foreclose on the property. Not to mention a short sale is almost as bad as a foreclosure and will wreck your credit. If the former buying is not willing to buy the house for what you owe your only real option is to come up with the difference. If he offers you say $50K less than you owe, you will have to give the mortgage holder the remaining balance $50K in this example for them to release the property.  Another problem you will face, if the former owner is willing to pay more than what the house is worth, and he is going to finance it, he will have to have enough cash to put down so that the loan amount is not more than the property is worth. Finally if none of that works you can just hold on to the property until the value comes up or you mortgage is payed down enough to make the balance of the mortgage less than the value of the house. Then offer the property to the former owner again. "I would not trust Zillow for an appraisal. The numbers I see on there vary a lot from real prices. I'm not sure I'd get a full appraisal either, as that means you ""know"" the value of the house and may be obliged to reveal it. I'd ask for the loan amount and see what the previous owner says." "How about doing a Lease Option with a very long term and a very early ""option"" for the guy buying.  Essentially he will be making your mortgage payments for the next couple few years.  Much less paperwork for the both of you that way. See a lawyer for the paperwork, from my limited experience with a real estate lawyer is a standard document and shouldn't cost that much." It's a short sale. See these for good overviews: http://www.realtor.org/library/library/fg335 http://homebuying.about.com/od/4closureshortsales/a/shortsalebasics.htm  You'll want input from your lawyer and accountant (assuming the lender says they would accept such a sale). Best of luck - sounds like this could be a great opportunity for you if it all comes together. DO NOT talk to a realtor. "A short-sale seems like an extreme and unethical course to take.  You should read your mortgage documents or work with your attorney to read the mortgage and determine whether it is an ""assumable"" mortgage. If so, you might be able to get the former owner to take over the mortgage."
"@fredsbend, Hope this helps!  ""I understand that a reverse mortgage can be paid out in two ways: A lump sum and monthly payments. I figure that if you take the lump sum, eventually, the bank wants you to start paying it back."" Answer:   Actually, there are 3 payout options, or 4 if you consider a combination payout as another one. There's a lump sum, a line of credit, or the monthly payout, or a combination.  ""I figure that if you take the monthly payments, eventually, the bank stops paying out and wants you to pay it back. In both situations, interest accrues and this is how the bank makes money off of the deal"".  Answer: The only time the monthly payments would stop would be if the borrower defaults on the lenders' terms or they no longer live at home. You are right though, and interest does accrue on whichever payment is decided on. I'm not sure how the lender makes money, probably by the interest, but I know borrowers are protected against high rates and owing more than your house. Here's an article I found that goes over the protections more in detail: https://www.americanadvisorsgroup.com/news/6-consumer-protections-reverse-mortgage-loan-borrowers.  ""But what determines when you have to begin paying back the reverse mortgage? Some sources online seem to say that it's based only on if you die or would like to sell/move. That can't be right in all situations, because you could end up with a massive debt on a property more than its value.""  Answer: There are a lot of protections or regulations in place to protect anyone who takes out a reverse mortgage. One being, you can't owe MORE than your house is valued at during the time of repayment, a reverse mortgage is a non-recourse loan. In the instance that your house is less than you owe, you either sell the home and the proceeds are used to pay the loan and you keep the rest OR if you owe more than the house proceeds of the home go to the lender. Either way, you're not left paying for a ""mortgage"" without the house. In the case the parent, grandparent passes, then the heirs would have a choice of either paying back the reverse mortgage in payments, OR they can sell the house, heirs are protected during this as well to make sure they're not left with major debt in case of anything.  Is there a formula to figure out when the bank stops the monthly payments and then wants it back?  **Answer:**The amount becomes due if loan terms are not met, but the lender will discuss the options if it comes to that.  Is there a different formula for when the lump sum would have to be paid back?""  Answer: Each payout option has the same terms and the same pay back terms. As long as terms are met, the lender can't ask for early repayment." "To expand on what @fishinear and some others are saying:  The only way to look at it is that the parents have invested, because the parents get a % of the property in the end, rather than the original loan amount plus interest.  It is investment; it is not a loan of any kind.  One way to understand this is to imagine that after 20 years, the property triples in value (or halves in value).  The parents participate as if they had invested in 75% ownership of the property and the OP as if 25% ownership of the property. Note that with a loan, there is a (potentially changing) outstanding loan balance, that could be paid to end the loan (to pay off the loan), and there is an agreed upon an interest rate that is computed on the outstanding balance — none of those apply to this situation; further with a loan there is no % of the property: though the property may be used to secure the loan, that isn't ownership. Basically, since the situation bears none of the qualities of a loan, and yet does bear the qualities of investment, the parents have bought a % ownership of the property. The parents have invested in 75% of the real estate, and the OP is renting that 75% from them for: The total rent the OP is paying the parents for their 75% of the property is then (at least) $1012.50/mo,  A rental rate of $1012.50/mo for 75% of the property equates to a rental price of $1350/mo for the whole property. This arrangement is only fair to both parties when the fair-market rental value of the whole property is $1350/mo; it is unfair to the OP when the fair-market rental value of property is less, and unfair to the parents when the fair-market rental value of property is more.   Of course, the fair-market rental value of the property is variable over time, so the overall fairness would need to understand rental values over time. I feel like this isn't actually a loan if I can never build more equity in the condo. Am I missing something? No, it isn't a loan.  You and your parents are co-investing in real estate.  Further, you are renting their portion of the investment from them. For comparison, with a loan you have 100% ownership in the property from the start, so you, the owner, would see all the upside/downside as the property valuation changes over time whether the loan is paid off or not. The borrower owes the loan balance (and interest) not some % of the property.  A loan may be secured by the property (using a lien) but that is quite different from ownership.  Typically, a loan has a payment schedule setup to reduce the loan balance (steadily) over time so that you eventually pay it off.  With a loan you gain equity % — the amount you own outright, free & clear — in two ways, (1) by gradually paying off the loan over time so the unencumbered portion of the property grows, and (2) if the valuation of the property increases over time that gain in equity % is yours (not the lenders).  However note that the legal ownership is all 100% yours from the start. Are my parents ripping me off with this deal that doesn't allow me to build my equity in my home? You can evaluate whether you are being ripped off by comparing the $1350/mo rate to the potential rental rate for the property over time (which will be a range or curve, and there are real estate websites (like zillow.com or redfin.com, others) to help estimate what fair-market rent might be). Are there similar deals like this...?  A straight-forward loan would have the borrower with 100% legal ownership from the start, just that the property secures the loan.  Whereas with co-investment there is a division of ownership % that is fixed from the start.   It is unusual to have both investment and loan at the same time where they are setup for gradual change between them.  (Investment and loan can certainly be done together but would usually be done as completely separate contracts, one loan, one investment with no adjustment between the two over time.) To do both investment and loan would be unusual but certainly be possible, I would imagine; however that is not the case here as being described.  I am not familiar with contracts that do both so as to take over the equity/ownership/investment over time while also reducing loan balance.  Perhaps some forms of rent-to-own work that way, something to look into — still, usually rent-to-own means that until the renter owns it 100%, the landlord owns 100%, rather than a gradual % transfer over time (gradual transfer would imply co-ownership for a long time, something that most landlords would be reluctant to do).   Transfer of any particular % of real estate ownership typically requires filing documents with the county and may incur fees.  I am not aware of counties that allow gradual % transfer with one single filing.  Still, the courts may honor a contract that does such gradual transfer outside of county filings. If so, what should I do? Explain the situation to your parents, and, in particular, however far out of balance the rental rate may be.  Decide for yourself if you want to rent vs. buy, and where (that property or some other).  If your parents are fair people, they should be open to negotiation.  If not, you might need a lawyer.   I suspect that a lawyer would be able to find several issues with which to challenge the contract. The other terms are important as well, namely gross vs. net proceeds (as others point out) because selling a property costs a % to real estate agents and possibly some taxes as well. And as the others have pointed out, if the property ultimately looses value, that could be factored in as well. It is immaterial to judging the fairness of this particular situation whether getting a bank loan would be preferable to renting 75% from the parents.  Further, loan interest rates don't factor into the fairness of this rental situation (but of course interest rates do factor into identifying the better of various methods of investment and methods of securing a place to live, e.g. rent vs. buy). Contributed by @Scott: If your parents view this as an investment arrangement as described, then you need to clarify with them if the payments being made to them are considered a ""buy out"" of their share. This would allow you to gain the equity you seek from the arrangement. @Scott: Terms would have to be (or have been) declared to that effect; this would involve specifying some schedule and/or rates.  It would have to be negotiated; this it is not something that could go assumed or unstated.  -- Erik" "Here are some important things to think about.  Alan and Denise Fields discuss them in more detail in Your New House. Permanent work.  Where do you want to live?  Are there suitable jobs nearby?  How much do they pay? Emergency fund.  Banks care that you have ""reserves"" (and/or an unsecured line of credit) in case you have a run of bad luck.  This also helps with float the large expenses when closing a loan. Personal line of credit. Who are you building for?  If you are not married, then you should consider whether building a home makes that easier, or harder.  If you hope to have kids, you should consider whether your home will make it easier to have kids, or harder.  If you are married (or seriously considering it), make sure that your spouse helps with the shopping, and is in agreement on the priorities and choices.  If you are not married, then what will you do if/when you get married?  Will you sell?  expand?  build another house on the same lot?  rent the home out? Total budget.  How much can the lot, utilities, permits, taxes, financing charges, building costs, and contingency allowance come to?  Talk with a banker about how much you can afford.  Talk with a build-on-your-lot builder about how much house you can get for that budget.  Consider a new mobile or manufactured home.  But if you do choose one, ask your banker how that affects what you can borrow, and how it affects your rates and terms.  Talk with a good real estate agent about how much the resale value might be. Finished lot budget. How much can you budget for the lot, utilities, permits required to get zoning approval, fees, interest, and taxes before you start construction? Down payment.  It sounds like you have a plan for this. Loan underwriting.  Talk with a good bank loan officer about what their expectations are.  Ask about the ""front-end"" and ""back-end"" Debt-To-Income ratios.  In Oregon, I recommend Washington Federal for lot loans and construction loans.  They keep all of their loans, and service the loans themselves.  They use appraisers who are specially trained in evaluating new home construction.  Their appraisers tend to appraise a bit low, but not ridiculously low like the incompetent appraisers used by some other banks in the area.  (I know two banks with lots of Oregon branches that use an appraiser who ignores 40% of the finished, heated area of some to-be-built homes.)  Avoid any institution (including USAA and NavyFed) that outsources their lending to PHH. Lot loan.  In Oregon, Washington Federal offers lot loans with 30% down payments, 20-year amortization, and one point, on approved credit.  The interest rate can be a fixed rate, but is typically a few percentage points per year higher than for a mortgage secured by a permanent house.  If you have the financial wherewithal to start building within two years, Washington Federal also offers short-term lot loans.  Ask about the costs of appraisals, points, and recording fees. Rent.  How much will it cost to rent a place to live, between when you move back to Oregon, and when your new home is ready to move into? Commute.  How much time will it take to get from your new home to work?  How much will it cost?  (E.g., car ownership, depreciation, maintenance, insurance, taxes, fuel?  If public transportation is an option, how much will it cost?) Lot availability.  How many are there to choose from?  Can you talk a farmer into selling off a chunk of land?  Can you homestead government land?  How much does a lot cost?  Is it worth getting a double lot (or an extra large lot)? Utilities. Do you want to live off the grid?  Are you willing to make the choices needed to do that?  (E.g., well, generator, septic system, satellite TV and telephony, fuel storage)  If not, how much will it cost to connect to such systems?  (For practical purposes, subtract twice the value of these installation costs from the cost of a finished lot, when comparing lot deals.) Easements. These provide access to your property, access for others through your property, and affect your rights.  Utility companies often ask for far more rights than they need.  Until you sign on the dotted line, you can negotiate them down to just what they need.  Talk to a good real estate attorney. Zoning. How much will you be allowed to build?  (In terms of home square footage, garage square footage, roof area, and impermeable surfaces.)  How can the home be used?  (As a business, as a farm, how many unrelated people can live there, etc.)  What setbacks are required?  How tall can the building(s) be?  Are there setbacks from streams, swamps, ponds, wetlands, or steep slopes? Choosing a builder.  For construction loans, banks want builders who will build what is agreed upon, in a timely fashion.  If you want to build your own house, talk to your loan officer about what the bank expects in a builder. Plansets and permits.  The construction loan process. If you hire a general contractor, and if you have difficulties with the contractor, you might be forced to refuse to accept some work as being complete.  A good bank will back you up.  Ask about points, appraisal charges, and inspection fees. Insurance during construction.  Some companies have good plans -- if the construction takes 12 months or less.  Some (but not all) auto insurance companies also offer good homeowners' insurance for homes under construction.  Choose your auto insurance company accordingly. Property taxes. Don't forget to include them in your post-construction budget. Homeowners' insurance.  Avoid properties that need flood insurance.  Apply a sanity check to flood maps -- some of them are unrealistic.  Strongly consider earthquake insurance.  Don't forget to include these costs in your post-construction budget. Energy costs.  Some jurisdictions require you to calculate how large a heating system you need.  Do not trust their design temperatures -- they may not allow for enough heating during a cold snap, especially if you have a heat pump.  (Some heat pumps work at -10°F -- but most lose their effectiveness between 10°F and 25°F.)  You can use these calculations, in combination with the number of ""heating degree days"" and ""cooling degree days"" at your site, to accurately estimate your energy bills.  If you choose a mobile or manufactured home, calculate how much extra its energy bills will be. Home design.  Here are some good sources of ideas: A Pattern Language, by Christopher Alexander.  Alexander emphasizes building homes and neighborhoods that can grow, and that have niches within niches within niches. The Not-So-Big House, by Sarah Susanka.  This book applies many Alexander's design patterns to medium and large new houses. Before the Architect.  The late Ralph Pressel emphasized the importance of plywood sheathing, flashing, pocket doors, wide hallways, wide stairways, attic trusses, and open-truss or I-joist floor systems.  Lots of outlets and incandescent lighting are good too.  (It is possible to have too much detail in a house plan, and too much room in a house.  For examples, see any of his plans.) Tim Garrison, ""the builder's engineer"".  Since Oregon is in earthquake country -- and the building codes do not fully reflect that risk -- emphasize that you want a building that would meet San Jose, California's earthquake code." The home owner does not start foreclosure, the bank decides when to foreclose.  Therefore you cannot really decide a time to foreclose if you are trying to time the decision. The process You miss payments, and the banks will send you a late notice for the missing payments.  Expect many notices. The bank will call you at home, on your cell phone and at work.  They will mail you letters regarding the missing payments. If you continue to miss payments, the bank will probably demand the loan be paid in full.  You will owe the bank the full balance of the principle, all past due interest, all past due late charges and junk fees.  The bank won't even take a normal monthly payment from you should you try to pay your regular payment again. Some law enforcement will notify you on the bank's intent to foreclose.  The bank has begun legal proceedings. Legal notices are published in the local newspaper. Soon the notices and the legal waiting period will expire.  Court proceedings happen.  The court will then allow the bank to foreclose. Notices to into the paper again about the updated status of the foreclosure. The house is sold at auction. Money from the auction is used to pay taxes owned, then mortgages, then other liens or creditors who file. Further debt for the home owner Taxes When sold, if the mortgage debt exceeds the home's fair market value, US Federal Tax rules say the selling price as the fair market value. The fair market value can still be higher than the tax basis (which I think is the value of the house at the time of original purchase plus improvements.).   If the fair market value is higher, you will own taxes on sale.  However tax rules in the US say if you have owned the home more than two years and make less than $250,000 in the transaction ($500,000 if married) you will not owe any tax.  State taxes can be different. Additionally, if the mortgage lender forgives the debt and doesn't create a deficiency, that income is taxable as well.  This is more an more common these days.  There are exceptions if the home is your primary residence. This whole process an take several months to occur, but depends on where you live.  If you continue to live in the home after the auction, the new owner must evict you from the property which is another set of legal proceedings. Your credit and ability to buy are home will be damaged for the next several years. I am not so sure on how PMI works for the banks, but I know they are getting some money back. I'm not saying it's great, but I have a 705... I think we'll get a second opinion to lower that rate. Also, logically, with a higher down payment, we should be able to reduce the amount we need to borrow. Is that how that would work? For example, if we scrounged up a $7,000 for a down payment and came down on the price say $3,000 I'm not sure about your first two options.  But given your situation, a variant of option three seems possible.   That way you don't have to throw away your appraisal, although it's possible that you'll need to get some kind of addendum related to the repairs.   You also don't have your liquid money tied up long term.  You just need to float it for a month or two while the repairs are being done.  The bank should be able to preapprove you for the loan.   Note that you might be better off without the loan.  You'll have to pay interest on the loan and there's extra red tape.   I'd just prefer not to tie up so much money in this property.   I don't understand this.  With a loan, you are even more tied up.  Anything you do, you have to work with the bank.  Sure, you have $80k more cash available with the loan, but it doesn't sound like you need it.  With the loan, the bank makes the profit.  If you buy in cash, you lose your interest from the cash, but you save paying the interest on the loan.  In general, the interest rate on the loan will be higher than the return on the cash equivalent.   A fourth option would be to pay the $15k up front as earnest money.  The seller does the repairs through your chosen contractor.  You pay the remaining $12.5k for the downpayment and buy the house with the loan.  This is a more complicated purchase contract though, so cash might be a better option.   You can easily evaluate the difficulty of the second option.  Call a different bank and ask.  If you explain the situation, they'll let you know if they can use the existing appraisal or not.  Also consider asking the appraiser if there are specific banks that will accept the appraisal.  That might be quicker than randomly choosing banks.   It may be that your current bank just isn't used to investment properties.  Requiring the previous owner to do repairs prior to sale is very common in residential properties.  It sounds like the loan officer is trying to use the rules for residential for your investment purchase.  A different bank may be more inclined to work with you for your actual purchase. The reason the loan amount is showing is because it is a default - the fact that you live in a non-recourse state doesn't change the fact that a loan obligation that had your name on it was defaulted upon. I don't think there is much you can do now given that your name was still on the mortgages. "The problem here can be boiled down to that fact you are attempting to obtain a loan without collateral.  There are times it can be done, but you have to have a really good relationship with a banker.  Your question suggests that avenue has been exhausted. You are looking for an investor, but you are offering something very speculative.  Suppose an investor gives you 20K, what recourse does he have if you do not pay the terms of the loan?  From what income will this be paid from?  What event will trigger the capability to make a balloon payment?    Now if you can find a really handy guy that really needs a place to live could you swap rent for repairs?  Maybe.  Perhaps you buy the materials, and he does the roof in exchange for 6 months worth of rent or whatever. If you approached me with this ""investment"", the thing that would raise a red flag is why don't you have 20K to do this yourself?  If you don't how will you be able to make payments?  For example of the items you mentioned: That is a weekend worth of work and some pretty inexpensive materials.  Why does money need to be borrowed for this? A weekend worth of demo, and $500 worth of material and another weekend to build something serviceable for a rental.  Why does money need to be borrowed for this? 2K?  Why does money need to be borrowed for this? This can be expensive, but most roofing companies offer financing.  Also doing some of the work yourself can save a ton of money.  Demoing an old roof is typically about 1/3 of the roofing cost and is technically simple, but physically difficult. So besides the new roof, you could have a lot of your list solved for less than 3K and three weekends worth of work.  You are attempting to change this into a rental, not the Taj Mahal."