6 strategies for dealing with an underwater mortgage
Stay and pay? Refinance? The pros and cons of several options
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Nearly 11 million homeowners are underwater — meaning they owe more on their mortgage than the property is worth — according to the most recent data from CoreLogic. For those homeowners, there are no easy answers. Should they keep paying and hope the market improves? Try for a loan modification? Cut their losses and walk away?
Gerri Detweiler, personal-finance expert for Credit.com, explains the pros and cons of several options.
1. Stay and pay. People feel attached to their homes, so Detweiler says their first impulse is often to stay put and keep sending in mortgage checks, even if it doesn't make financial sense in the long run. "Is it realistic for you for a while?" she asks. "Not just the next few months, but can you afford to stay and pay for the next several years? You may still be underwater at that point." Maintenance fees are another consideration. For instance, if you know you'll need a new roof or the heating system is on its way out, those repairs can add up. Of course, if the value of your home has declined, you may be able to get it reassessed and pay lower property taxes. (Bing: Lower your property taxes)
2. Refinance. A traditional refinance may not be an option for homeowners with negative equity. But those with loans owned by Fannie Mae or Freddie Mac who have not made late payments in the past six months and have no more than one late payment in the past 12 months may qualify for a refinance under the Home Affordable Refinance Program, which was recently extended through the end of 2013. If your loan hasn't been sold to Freddie or Fannie, Detweiler says you may be able to work directly with your lender on a refinance. Your credit score should not be affected if you refinance, although you could still lose your home if your situation changes and you can't afford the mortgage payments.
3. Loan modification. In a loan modification, the lender agrees to lower the interest rate and payments, either temporarily or permanently. If your mortgage payment is more than 31% of your monthly pretax income and you have suffered a financial hardship, you may qualify for a loan modification under the Home Affordable Modification Program. Some lenders have their own loan-modification programs as well. Trouble is, the process can be extremely time-intensive. And few loan modifications actually reduce the principal, so you're still in negative equity — you've just lowered your monthly payments. "Until you're at positive equity, you're stuck with that house," Detweiler says, pointing out that if there is a reduction in principal, you might have to pay taxes on that amount. Depending on how the modification is reported by the lender, it could also affect your credit score. She suggests consulting a credit agency approved by the Department of Housing and Urban Development to discuss your options.
4. Short sale. If your lender agrees to a short sale, you're allowed to sell your house for less than you owe on the mortgage. "One couple I interviewed got … $120,000 wiped out by their lenders," Detweiler says. "Depending on where you live and your financial circumstances, there are some amazingly good deals. But you could be one of the unlucky ones who has a lender who doesn't want to play ball." Before you close on a short sale, be sure to consult a tax professional, who can explain if you will owe any taxes on the forgiven debt, and a real-estate lawyer with experience in short sales to make sure the agreement relieves you of the deficiency.
5. Foreclosure or walking away."Walking away from your mortgage is essentially the same as foreclosure," Detweiler says. "It's one of the most serious items on your credit report, in the same category with bankruptcy and repossessions." But the impact on your credit score shouldn't be the only consideration, Detweiler says. "Focus on 'How am I gonna come out of this financially?'" If you do decide to walk away, your biggest challenge could be getting the bank to take back the house. "The bank doesn't actually foreclose on that, so you're still legally responsible," Detweiler says. "The city may bill for trash pickup; you could be on the hook for insurance issues that arise." She suggests staying on the property as long as possible to make sure it's properly maintained leading up to the foreclosure.
6. Bankruptcy. Filing for bankruptcy won't erase mortgage debt. "What you're doing in a bankruptcy is you're trying to give yourself a reprieve," Detweiler says. Eliminating other debts could free up money to cover your mortgage, and a Chapter 13 bankruptcy could allow you to catch up on payments for five years without interest. But it doesn't allow you to stop paying the mortgage altogether. "In some areas of the country, you are able to wipe out a second loan that has become unsecured because the value of your property has dropped," Detweiler says. "Unfortunately, our current bankruptcy codes let borrowers negotiate any kind of debt but mortgages."
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Whether you're planning to stay and pay or you're considering bankruptcy, Detweiler stresses that it's a good idea to consult an attorney early on. "Don't make that your last resort," she says. "Specifically, a bankruptcy attorney could help you decide if you can afford to stay in your home."
Can you say BAILOUT? I knew you could. You can call it HAMP, HARP whatever it's another bailout.
Under the HAFA program a participating lender who holds the 2nd mortgage who accepts a short sale can then take the balance owed on that 2nd mortgage to the Treasury Dept and they will receive 1/3 of the balance owed.
The numbers don't lie a Short Sale is the best option. You own a home worth $350,000 you owe $510,000. At 5% interest rate for Loan Modification, at $510,000 plus refinance fees. Assuming housing increases 5% in value every year. It will take you approximately 9 years before you can sell and break even. Minus sales commissions I would have about $4,000.
If you Short Sale today current FHA guidelines say you can purchase a new home in 2 years after the close of the Short Sale. During that same 9 year period you would have approximately $130,000 in equity.
So tell me, since I just don't understand -
Why was working like a slave for a home you couldn't afford OK to do in 2005 but even when the payments are the same and the income is the same, its not OK now? Its not like these prices aren't coming back up. Homes are undervalued right now - some places are priced all the way back to the year 2000. And yet, when someone has a job, that person isn't making Y2O money. Maybe 2005 or 2006 money, but not 2000 money. Add in 4% interest, and new home purchases are a smaller part of a family budget than they have been in a long time. What keeps them artifically low like this is instability and fear. Not knowing if your degree will ever be of use; or if your current employer will ship your job off to Mexico, China or India; whether your boss will ever let you work only 40 hours again; if you will be getting a raise (even a COLA) raise - all of these factors keep people from buying and upgrading, which is keeping prices below true value. When this recession ends - hopefully with some protectionist legislation - we'll see prices jump back up to nromal levels rather quickly. No, it may be some time before we see bubble-prices again, but the demand is really there - under all this uncertainty.
When a person finances a new or used car, the amount owed is more than the current value the moment that the paperwork is signed. Does this mean that the amount that is paid back should be based on the value or the full amount loaned?
I believe the American dream was supposed to work something like this, Graduate high school, go to college (maybe) get a job and start saving for a down payment. Hopefully about the time you turned 30, you had your down payment and could buy a house within your means. After 30 years, you would have that house paid for a few years before retirement. After retirement you could sell the house and use that money to move into a smaller (cheaper) retirement house. Over the course of 30 years your house should have gone up in value, so when you sell you should have a pretty piece of change in your pocket. Houses never were to be an investment vehicle for making big money, but for the average American it was a pretty good investment. I was forced to sell my last house in a divorce, and she got most of the money, so at age 42 I bought a new house and smaller house that I could afford and was not so over priced that I would loose it when I knew sooner or later something was going to flatten out the housing bubble. I also have custody of my 2 girls, and wanted a place they could call home, and be proud of, so I remodeled most of it and have a very nice house. The thing is I paid for the remodel and took about a year to do it, so nothing went on credit for that. Now even with the Market I'm not underwater, but Zillow says my house is worth what I owe on it. I am doing every thing I can including working 2 jobs to keep my house, I firmly believe that this has to end sooner or later, probably later. I also firmly believe that those of us left that still own our houses are going to be in much better shape than those that walked away, or filed bankruptcy. I also believe that I signed that contract and I have an obligation to pay it.
But let me tell you the rest of this, my ex opened a credit card account after we filed for divorce. She held the card for several years and then put $18,000 on it and never made a payment, after about 6 months I got a call from my bank telling me they could help repair my credit. When I bought my house my score was 815. Anyway, this is when I found out about this other card, I took my ex back to court and the judge assigned all the responsibility for the card and the debt to her. The credit card Company has my forged signature and that is it, all charges on the account were from the card issued to my ex, all payments came out of her personal account and they have nothing to prove that I benefitted form this card. They refuse to take my name off the account, they have ruined my credit score, and continue to hit it every month with a bad debt, none payment, and over drawn hit. I have called the state attorney general, and anybody else I can think of but nobody can help. I even went back and talked to the judge and was told he has no authority to tell them what to do. They also turned this over to about 7 different collection agencies, and every time I tell them my story and send them the court order they always tell me this should be taken off and i never hear from them again.
So for those of you thinking of walking away from debt, the companies don't just write this off and walk away, the only way I know how to get out of this is to go file bankruptcy, but I have a moral problem with this and also not sure if I want to pay a lawyer $5,000.00 with no guaranteed results. I also refuse to pay the debt which is $28,000. I pay every other bill I have and have never been late on any payment, but all the other banks refuse to look at this, they are only interested in that score. So for those of you setting on the fence, and not sure what to do, I would have to say man up and pay your bills, you signed the contract, you bought this stuff, now pay for it.
I think that if your financial situation hasn't changed, but you gambled on home prices continually rising and lost that bet- you should keep paying your mortgage. However, if you lost your job(s), received a pay cut, illness, &/or etc has ruined your ability to pay the mortgage then you should do what is best for you and your family. Some posters here seem to forget people that people need more than just a place to live, but that they need food, water, and etc. A house note is most people's biggest expense in their life which means it's the biggest drain that can put you on the street - seen it happen.
What people fail to realize that even when the market was doing well that the banks are betting against you being able to pay off your mortgage and still win if you do pay it off, remember a lot can happen to a person or family in 15 or 30 years. People get sick, lose jobs, and die everyday one way or another, and when that happens they usually have paid a significant amount of the mortgage. We all need to realize that when we have a mortgage loan, we will have paid off the original loan amount 2.5 to 4 times over. A part of the problem for banks is due to bubble popping they can't get the resale amount or the insurance.
If your house has lost X% of it's value, your mortgage payment could be adjusted to - X%
of what it was. This might create more problems in the future, but could be a temporary fix for some people who wish to remain and pay. Better for everyone than walking away.