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."
I'd rent and put the $30K/ yr into savings. When the short sale comes off your credit, you'll have a substantial downpayment.  You don't mention the balance, but the current rate you're paying is 3% too high. Even if you get the rate reduced, you have a $100K issue.  I recommend reading through Will Short Sale Prevent Me From Getting VA Home Loan Later? A bit different question, but it talks more about the short sale. A comment for that question makes a key point - if you have a short sale, will the bank chase you for the balance? If not, you have a choice to make.  Adding note after user11043 commented - First, run the numbers. If you were to pay the $100K off over 7 years, it's $1534/mo extra. Nearly $130K, and even then, you might not be at 80% LTV. I don't know what rents are like in your area, but do the math. First, if the rent is less than the current mortgage+property tax and maintenance, you will immediately have better cash flow each month, and over time, save towards the newer house.  If you feel compelled to work this out and stay put, I'd go to the bank and tell them you'd like them to recast the loan to a new rate. They have more to lose than you do, and there's nothing wrong with a bit of a threat. You can walk away, or they can do what's reasonable, to just fix your rate. With a 4% rate, you'd easily attack the principal if you wish. As you commented above, if the bank offers no option, I'd seriously consider the short sale. There's nothing wrong with that option from a moral standpoint, in my opinion. This is not Bedford Falls, and you are not hurting your neighbors. The bank is amoral, if not immoral. "2.5%? Whoa, you are being robbed there.  Straight-up, stripped-down, and bent-over-a-table robbed. Never agree to ""fees"".  If they don't want to do the work to give you a loan, there are other lenders who do. Rarely agree to ""points"".  If you know -- and I don't mean ""think"", I mean ""know"" -- if you know that you are going to hold that loan much longer than it would take to repay those points, then maybe.  For example, if they are charging one point to lower your rate 0.25%, you want to be totally sure you will stay in the house at least four years, and probably more like six or eight years before moving or refinancing. It's more-or-less OK to pay for the appraisal.  If something goes wrong with the loan application, the appraisal will be valid for a few more months, you can try again. I once had 14% cash for a down-payment.  The loan officer said if I could come up with 15%, the rate would be reduced by 0.25%.  To get the money, I took a ""reverse point"", which paid me 1% but raised my the rate by 0.25%. The loan officer, who wasn't too bright, asked, ""Why did you do that?  The two things cancel each other out."" ""I did it,"" I explained, ""because you paid me 1% of the value of my house to sign my name twice.""" "Go on a website that has real estate listings.  Find similar homes in the same neighborhood and list out the prices.  Once you have prices, pick out two with different prices and call the realtor of the more expensive listing.  Tell that realtor about the other listing and ask why their listing is more expensive.  Compare their answer to the home that you are considering buying.   For example, they may say that their house has a newly remodeled kitchen.  Does the house you are considering have a newly remodeled kitchen?  If so, then use the higher priced listing and throw out the cheaper one.  If not, use the cheap listing and throw out the expensive one.   Or they might say that the expensive house is in a better location than the cheaper house.  Further away from traffic.  Easier to get to the highway or public transportation.  If so, ask how the location compares to the house you are actually considering.  The realtor will tell you if the listings are comparable.   When I talk about ""similar homes,"" I mean homes that are similar in square footage, number of bedrooms, and number of bathrooms.  Generally real estate sites will allow you to search by all of these as well as location.   After all this, the potential seller may still turn you down.  If he really wanted to sell, he'd have suggested a price.  He may just be seeing if you're willing to overpay.  If so, he could turn down an otherwise reasonable offer.  How much he is willing to take is up to him.   Note that this would all be easier if you just bought a house the normal way.  Then the realtors would do the comparables portion of the work.  You might be able to find a realtor or appraiser who would do the work for a set fee.  Perhaps your bank would help you with that, as they have to appraise the property to offer a mortgage.   You asked if you can buy out a mortgaged house with a mortgage.  Yes, you can.  That's a pretty normal occurrence.  Normally the realtors would make all the necessary arrangements.  I'm guessing that a title transfer company could handle that." With no agreement in place, the other person can go after half the equity in the house. In my opinion, wanting their down payment back seems reasonable. "Often, if your realtor and the selling realtor know each other, your realtor will ""discover"" what price the seller really wants. (Don't worry about how this is done. There will be no evidence it occurred!) Your realtor will then drop hints that you should aim for that price to ensure the deal goes smoothly. That sounds like what your realtor is doing when he says ""If you want to play ball offer them $80k."" He won't stop you from bidding lower, but he knows where you'll end up.  Price is just one part of the transaction, however. You can offer $80K, to meet their price, but also request that the seller make recommended repairs or credit you the cost. You can request that the seller cover closing costs or transfer taxes or any other costs. In short, offering the seller X doesn't mean you will pay X. I personally try to avoid credits, because although they make your effective price lower, the actual purchase price still drives things such as your loan, and in many places, your property taxes and other taxes. I would rather reduce the price than get credits. But you do what you have to do if you want the deal. You can also request that certain appliances be included, such as a refrigerator or a washing machine and dryer. You can ask for furniture, or statues in the backyard, or anything else you liked when you saw the house. In short, you offer X for the house, but you also get a bunch of other stuff that you need or want." Not a good idea, the bank is a lean holder unless you deduct the remainder of the loan from the purchase price you will end up paying much more. Tell the seller to pay off the loan and provide you a clean title. Btw unless you're getting the deal of the century I'd walk away until I saw a clean title Save up a bigger downpayment.  The lender's requirement is going to be based on how much you finance, not the price of the house. The terms of most mortgages usually include the requirement for tax escrow. Some banks will let you handle your own taxes once you loan to value drops below 50%. It's annoying that you lose the use of your own funds, I agree. It can't hurt to write a note to the bank and see it they'll waive escrow. "Any sensible lender will require a lean lien against your formerly-free-and-clear property, and will likely require an appraisal of the property. The lender is free to reject the deal if the house is in any way not fitting their underwriting requirements; examples of such situations would be if the house is in a flood/emergency zone, in a declining area, an unusual property (and therefore hard to compare to other properties), not in salable condition (so even if they foreclose on it they'd have a questionable ability to get their money back), and so forth. Some lenders won't accept mobile homes (manufactured housing) as collateral, for instance, and also if the lender agrees they may also require insurance on the property to be maintained so they can ensure that a terrible fate doesn't befall both properties at one time (as happens occasionally). On the downside, in my experience (in the US) lenders will often require a lower loan percentage than a comparable cash down deal. An example I encountered was that the lender would happily provide 90% loan-to-value if a cash down payment was provided, but would not go above 75% LTV if real estate was provided instead. These sort of deals are especially common in cases of new construction, where people often own the land outright and want to use it as collateral for the building of a home on that same land, but it's not uncommon in any case (just less common than cash down deals). Depending on where you live and where you want to buy vs where the property you already own is located, I'd suggest just directly talking to where you want to first consider getting a quote for financing. This is not an especially exotic transaction, so the loan officer should be able to direct you if they accept such deals and what their conditions are for such arrangements. On the upside, many lenders still treat the LTV% to calculate their rate quote the same no matter where the ""down payment"" is coming from, with the lower the LTV the lower the interest rate they'll be willing to quote. Some lenders might not, and some might require extra closing fees - you may need to shop around. You might also want to get a comparative quote on getting a direct mortgage on the old property and putting the cash as down payment on the new property, thus keeping the two properties legally separate and giving you some ""walk away"" options that aren't possible otherwise.  I'd advise you to talk with your lenders directly and shop around a few places and see how the two alternatives compare. They might be similar, or one might be a hugely better deal! Underwriting requirements can change quickly and can vary even within individual regions, so it's not really possible to say once-and-for-all which is the better way to go." "There is considerable truth to what your realtor said about the Jersey City NJ housing market these days. It is a ""hot"" area with lots of expensive condos being bought up by people working on Wall Street in NYC (very easy commute by train, etc) and in many cases, the offers to purchase can exceed the asking price significantly. Be that as is may, the issue with accepting a higher offer but smaller downpayment is that when the buyer's lender appraises the property, the valuation might come in lower and the buyer may have to come up with the difference, or be required to accept a higher interest rate, or be refused the loan altogether if the lender estimates that the buyer is likely to default on the loan because his credit-worthiness is inadequate to support the monthly payments. So, the sale might fall through. Suppose that the property is offered for sale at $500K, and consider two bids, one for $480K with 30% downpayment ($144K) and another for $500K with 20% downpayment ($100K).  If the property appraises for $450K, say, and the lender is not willing to lend more than 80% of that ($360K), then Buyer #1 is OK; it is only necessary to borrow  $480K - $144K = $336K, while Buyer #2 needs to come up with another $40K of downpayment to be able to get the loan, or might be asked to pay a higher interest rate since the lender will be lending more than 80% of the appraised value, etc. Of course, Buyer #2's lender might be using a different appraiser whose valuation might be higher etc, but appraisals usually are within the same ballpark.  Furthermore, good seller's agents can make good estimates of what the appraisal is likely to be, and if the asking price is larger than the agent's estimate of appraised value, then it might be to the advantage of the selling agent to recommend accepting the lower offer with higher downpayment over the  higher offer with smaller downpayment. The sale is more likely to go through, and an almost sure 6% of $480K (3% if there is a buyer's agent involved) in hand in 30 days time is worth more than a good chance of nothing at the end of 15 days when the mortgage is declined, during which the house has been off the market on the grounds that the sale is pending. If you really like a house, you need to decide what you are willing to pay for it and tailor your offer accordingly, keeping in mind what your buyer's agent is recommending as the offer amount (the higher the price, the more the agent's commission), how much money you can afford to put down as a downpayment (don't forget closing costs, including points that might be need to be paid), and what your pre-approval letter says about how much mortgage you can afford.  If you are Buyer #1, have a pre-approval letter for $360K,  and have enough savings for a downpayment of up to $150K, and if you (or your spouse!)  really, really, like the place and cannot imagine living in any other place, then you could offer $500K with 30% down (and blow the other offer out of the water). You could even offer more than $500K if you want. But, this is a personal decision.  What your realtor said is perfectly true in the sense that for Y > Z, an offer at $X with $Y down is better than an offer at $X with $Z down. It is to a certain extent true that for W > X, a seller would find an offer at $X with $Y down to be more attractive that an offer at $W with $Z$ down, but that depends on what the appraisal is likely to be, and the seller's agent's recommendations." 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. You should read the provisions in your offer and any counteroffer that was signed before paying the earnest money, but generally if the appraisal comes in low, the price has to be adjusted. If you can't get a mortgage (because the appraisal is too low) the next guy usually can't either. Unfortunately without more information (the documents that were signed and the locale, to know which laws might be applicable) I can't tell you with certainty that you'll get your earnest money back. You'd probably need to prove you can run the business if you want a loan. The best proof you can have is to run the business.  Unfortunately that also means that the price of the alley could go up. OP needs to start thinking about a negotiation strategy soon. "There are a few of ways to do this: Ask the seller if they will hold a Vendor Take-Back Mortgage or VTB. They essentially hold a second mortgage on the property for a shorter amortization (1 - 5 years) with a higher interest rate than the bank-held mortgage. The upside for the seller is he makes a little money on the second mortgage. The downsides for the seller are that he doesn't get the entire purchase price of the property up-front, and that if the buyer goes bankrupt, the vendor will be second in line behind the bank to get any money from the property when it's sold for amounts owing. Look for a seller that is willing to put together a lease-to-own deal. The buyer and seller agree to a purchase price set 5 years in the future. A monthly rent is calculated such that paying it for 5 years equals a 20% down payment. At the 5 year mark you decide if you want to buy or not. If you do not, the deal is nulled. If you do, the rent you paid is counted as the down payment for the property and the sale moves forward. Find a private lender for the down payment. This is known as a ""hard money"" lender for a reason: they know you can't get it anywhere else. Expect to pay higher rates than a VTB. Ask your mortgage broker and your real estate agent about these options." I feel your pain. It probably depends on your state, but two things we've tried with some benefit: