What Can I Do If I Want a New House But Have Lost My Equity & Can't Sell My Old One?

You have negative home equity if your mortgage debt exceeds your property value. Negative equity in your current home can make buying a new home difficult or impossible. However, in some instances you can sell your home and purchase a new house despite having negative equity, but your ability to do this depends on your lender's flexibility and your own financial strength.

Cash

When you buy a new home, you typically need to make a down payment of at least 20 percent unless you obtain private mortgage insurance, in which case you can get a loan with a smaller down payment. You also need money to cover the closing costs on the new home. If you have cash savings, you can sell your home and pay off the remaining balance with your cash reserves. You can then use your remaining savings to cover the costs associated with buying your new home.

Loans

You cannot take out a purchase loan for an amount in excess of the property's value, but you can draw on other sources of financing to cover the down payment, closing costs and the repayment of any excess balance on your current mortgage.

Federal tax laws enable you to borrow up to $50,000 from your 401(k) plan for any purpose. If your employer does not allow you to take out 401(k) loans, you can take a 401(k) hardship withdrawal to cover costs associated with buying a home. Obviously, depleting your retirement account to finance the purchase of a home creates an issue for you in the long run. You can also use credit cards or unsecured personal loans, but unlike 401(k) loans, those options generally involve variable interest rates.

Rental

If you have enough cash or sufficient credit to buy a new home, you can make the purchase and simply convert your existing home into a rental property. When you do this, your property insurance costs will increase. You can use the rental income to cover the cost of your mortgage until you build sufficient equity to enable you to sell your home.

Considerations

You can approach your lender about doing a loan modification if your mortgage balance exceeds your home's worth, but do not expect your lender to agree to modify your loan if you are planning on buying a new home. Alternatively, you could try to arrange a short sale, which involves your lender agreeing to accept less than the balance owed on your mortgage when you sell your home. However, a short sale has a negative impact on your credit report and may make future financing very difficult. You may also run into legal issues with your lender if you buy a new home and then allow your original home to go into default as many states allow lenders to sue you if a foreclosure sale does not raise enough money to cover your mortgage debt.

References

• Bankrate.com; Upside Down on Home? Take a Deep Breath; Don Taylor; April 2008
• Experian; Impact of Mortgage Short Sale on Credit Report; March 2008
• Bankrate.com; Can you Refi When You're Upside Down?; February 2008
• IRS.gov; 401(k) Resource Guide - Plan Sponsors - General Distribution Rules; March 2011

Resources

• Bankrate.com; What if You're Upside Down in Your Home?; Barbara Mlotek Whelehan; October 2008