Wednesday, November 30, 2011
As explained by mortgage analysts in this CNBC article, ‘effective net equity’ is the equity you actually can use as a down payment on your next house. If you use an agent to sell your home, you’ll forfeit 6% of the sale price to a commission. For about 25% of American homeowners, that 6% means that they don’t have enough of a down payment to meet the standards required by most mortgage lenders (which take their cues from secondary lenders Fannie Mae and Freddie Mac).
In other words, the agent commission has forced these homeowners under water – owing more than their house is worth, after the transaction expense.
Officially, 28.6% of mortgageholding American homeowners owe more than their houses are worth. If they sold, they would have to arrange for their lenders to take less than they owed on the mortgage – the classic definition of a ‘short sale.’ At that point, agents typically accept a smaller commission, as the terms of the sale are dictated by the lender.
But by the ‘effective net equity’ definition, about half of mortgageholding homeowners are under water.
Simply put, what’s good for agents – commissions – is what’s bad for American homeowners. Read more about the business case that supports selling by owner, including what the Freakonomics authors did when they sold their own houses.
Image courtesy of Morguefile contributor blackhornet.