Calculating equity can be tricky, especially with a shifting market. It usually starts with the presumed fair market value minus the presumed mortgage balance. And, that’s a good start — but there can be what I call “equity eaters” that require more digging.
A commonly overlooked equity eater is what’s known as deferred principal balance.
Deferred principal balances primarily arose out of loan modifications during both the 2008 market crash and forbearances during the pandemic, but they can also exist at any time due to an accumulation of delinquent mortgage payments as a result of financial strain. Deferred balances can be tens of thousands of dollars, so equity can be significantly impacted — if not eroded completely.
Keep in mind: The actual payoff balance is a different figure than the mortgage balance, so these deferments often do not show up on a mortgage statement. That’s why a payoff should be ordered; it will show the exact to-the-penny amount that’s owed.
Prior to dividing equity or determining whether or not you’re willing to stay on a case contingent on your fees being paid out of the house’s equity, you should ask the following three questions:
Have you ever been late on your mortgage payment?
Have you ever done a loan modification?
Have you ever done a forbearance?
While it’s always more accurate to work off a mortgage payoff, it would be best practice to have your client order a payoff if they answer “yes” to any of these questions.
To accurately figure out equity, you’ll also need a reliable property value as well as a full title report to uncover any liens, judgments, or encumbrances that also impact the net. As a Real Estate Professional, I can assist with obtaining all of these documents.