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."
A B, I know what you are going through. We bought our house at just of $200,000. Bottom dropped out and our how is now worth about $165,000. We have lived here for just 6 years, so not much of the original principal has been paid down. Tried a modification once and our payment went up. (?)
Tried it again and they said we didn't make enough money for a modificaton. (That was after we both lost our jobs) My wife will start a new job next week so the bank said to submit the modification again. I am not optomistic.
I guess we are stuck with it forever? We looked into not paying the property taxes and letting it go to a tax sale, but we are under the impression that at that time, the bank could sue us for the deficiency because of the promissory note underlying the mortgage.
They also refuse to accept a short sale in full. In other words if we only get 1/3 of what we owe, they will sue us for the rest.
any advice, or should we see our attorney? We are in Iowa.
Nothing like stating the complete obvious with this article. Unless your loan originated with Fannie Mae or Freddie Mac there are no good solutions if your home is underwater. You are screwed no matter which path you take. Even if you hang on to your home you are throwing your money out the window. If you foreclose your credit is messed up for a long time. And by the time you have cleared your good name in 5-7 years home prices will have gone up and you will have missed out on any gains you would have had if you had owned a home. If you stay in your current home and ride it out you might just break even in five years(Maybe in a good location). Then if you go to sell it you have an automatic 6% taken of the top for your hard working real-estate agent. So really to break even you would have to have at least 6% equity in your house which you can kiss goodbye upon closing. This situation puts us Americans in complete grid lock. My opinion is that the banks ultimately complete Mother F_ _ _ _ ed us. They originally were giving loans to anyone who could fog a mirror. They were giving people big loans that had no business qualifying for. In turn it quickly and drastically artificially inflated home prices. What were we supposed to do at the time, rent a piece of crap house knowing that someday the bubble will burst and we will someday get a good price on a home. It just doesn't work that way. Everyone was jumping on the band wagon because home prices were going up so fast we didn’t think we would ever be able to afford something in the future. All this because banks were completely irresponsible and greedy. So we end up paying the price at the end of the day while the banks get bailed out by our government. There is something wrong with this picture.
so ioptions you are saying that your contract was a either or situation, It gave you an option to either pay the money back or let the bank have the house at any given point.
There was nothing in the contract that said you had to pay the money back? The Bank made a calculated risk that said it was either or so you had the option in your contract to choose. Am I understanding that correctly.
There's a lot of folk on here indicating that you should do this or should do that. The fact is that you should do whatever is legal and comfortable for you. In the contract that I signed (and I read this contract very well before I signed it) it says that if I pay the bank back their money I get to keep my house after 30 years OR if I don't pay the bank back their money they will take my house. I chose the second option of my legal contract and have never been happier.
I did a strategic default. Bought a second home (420k) before losing my first home to foreclosure (originial home price - 525k, home value today - 340k). I had enough in assets to qualify for a second home (about 40k in cash and about 150k in 401k) and credit score about 800. My second home is substantially bigger than my first home (it is what we wanted to buy the first time we bought a home but the price was very high - about 825k back in 2004. We always knew when we bought our first home that we would eventually move out to a bigger home when our family grew and our income also grew. So we always knew that someday we would need to plop down at least 825k for the home that we wanted. I've calculated out what the strategic default has done for our finances and it is amazing. Over the next 30 yrs we stand to save about $1 million dollars. About 400k comes simply from the cost savings of the house while the remainder comes from savings in interest, property taxes, private mortgage insurance, and home insurance. All of these items are based on essentially the value of the home and since 420k is about 1/2 of 825k I pay about 1/2 of what I would have paid.
I live in California which is a nonrecourse state. I had two loans on my first home (80/20). Because of the recent federal and state tax codes I will not be responsible for the difference on these loans since I lost my home to foreclosure.
From a financial standpoint the only thing that took a hit was my credit score. It went from about 800 to 633. After 1 year my score went up to 680. After 1 more year (based on a FICO) my score will increase to about 720 which is in the above average range.
Can someone please explain the logic as to why it is the banks fault. I hear this from the media and people a like and just don't get it. If I buy something,say a horse and don't have enough to pay cash for it so I look for someone to lend me money. If you are the one who lends me the money how is it your fault if the value of my horse drops or even disappears by death. Don't I still owe you the money I borrowed. I realize some will say that a home is collateralized but that is just a form of insurance I still owe you the full amount.
I get that some people loose jobs or sickness comes in and I think there should be something in place to help you. I just don't get the others that say it is too much so I am not going to pay you back. If I say this too you when you lent me the money you are going to consider that stealing from you.
Just because a bank is a buisness does not take away the need to pay it back. Someone please give me a good explenation so I can understand this. I would assume that there is one with everyone saying it I just dont understand what it is.
If you add extra to the payment you could chip away some of the principal and interest on the loan. It would only mean something if you were going to stay in the home long term. I found it's not worth it for us to refi after only being in the home for 4 years. Some of the programs they are pitching are not as good as they sound. One would have tacked on an extra 3 years to the end of the term and would have only saved us a few dollars a month. The only sure fire thing it seems to me is to walk away and cut your loss. Being in the trades i knew home values were extremely inflated and opted to by small to limit the amount i overspent on the house. It still burns my cooley to know some people still want to believe home prices are undervalued so it saves face on their dumb purchase.
A little secret. Market value doesn't work anymore. There are set costs that determine how much a house cost to build. Just like ebay you can't say mines worth x because his sold for x. You can have a brand new 2k sq/ft home built in an area for $90 a square + the lot. I still see similar 60yr old homes in that same area selling for $150 sq/ft and they need work. If you want to know how much a house is worth go to the yellow pages and find a contractor.
I think we are seeing a lot of investors bailing out now. They dump their properties then buy more in the depressed market. They see a bigger profit margin each month.
Many people were assured they could refinance in the next year when they got their adjustable rate loans and when it came time, they were denied. There is much culpability with the lenders, etc. I witnessed this first hand and wanted to say "How do you know they will be able to refinance later?" People did a re fi to make improvements and now their homes aren't worth the value.
We are a trusting bunch and this is a hard lesson for us all to learn.
Some info from the US Census Bureau:
The median household income in 1970 was $9,870. Median sale price of a new home $23,400.
The median household income in 2010 was $49,445. Median sale price of a new home $221,800.
In real terms, that makes it almost twice as expensive to own a house now.