What To Do If Your Mortgage is Under Water

By | September 30, 2021

With over 20% of all homeowners being upside down with their Your Mortgage, it’s no wonder that lots of people are starting to ask if it’s really worth staying in a home that’s worth much less than the mortgage they are paying.

After all, what’s the point of paying a $300,000 mortgage over 30 years when your home is now only worth $250,000? A lot of homeowners look at the numbers and immediately figure it’s better to just walk away from their homes, but the reality of the situation is a little more complex.

If you’re underwater with your home loan there are actually lots of different options available to you, though some of them can be quite unpleasant. Here are some of the things you can do if your mortgage is underwater:

There are specialize home selling books for difficult mortgage situations.

Try To Modify Your Home Loan

This is the first step you should take in almost every case, whether you can afford your mortgage or not. Trying to convince a bank to modify your home loan isn’t easy, but it is possible. You’ll need lots of patience and persistence to work out all the details. Some banks may not even consider a mortgage modification unless you’re behind on payments, while some may be more willing to look into the matter.

Sell Your Home At A Loss – But Get Paid For It

This is a brand-new option. There is now a federal program that will allow you to “short sell” your home at the current market value and not owe your bank the remainder of the loan. As an added bonus, you will even be paid $1,500 to help you move and find a new place to live. Here are more details about how you can get paid to sell your home.

Stay In Your Home: One option which the news media doesn’t like to cover is pretty simple – just ignore your home’s value and keep paying the mortgage while you live there. Sure, your house is worth less than you originally financed right now, but no one knows where the housing market will be in another five to ten years. Eventually, you will pay off your mortgage and then your home will definitely be worth more than what you owe ($0!). Don’t forget that there’s also a value to keeping your family in the same home without going through the stress and hassle of a move.

Remember, when you buy a new car and drive it off the lot that new car is “instantly” underwater. You may owe $30,000 on the car, but you could only sell it to someone else or trade it in for $20,000. As long as you don’t plan to sell the thing that’s underwater, you’re perfectly okay.

Consider Renting Out Your House – Your Mortgage

A somewhat riskier move is to try renting out your home while renting another place that’s less expensive than your current mortgage. You may not make enough from rent to pay your entire mortgage, but some people have been able to slash their monthly expenditures by moving into an apartment while renting out their home. Renting out your home is not to be taken lightly, though, and may require the services of a lawyer or rental management company to make sure all the legal details are worked out.

This move could be risky because your income is based on finding a stable and consistent renter quickly so that your home isn’t empty for too long. Another option is renting out a separate room or part of your home to someone else, though there are lots of laws and regulations about exactly what you can and can’t do with rental living quarters.

Save Your Home or Walk Away With Cash in Your Pocket

Sell Your Home At A Loss: This is called a “short sell” and it could be an option if you want to get away from your home loan obligations without destroying your credit score. Unfortunately, you will more than likely still owe the bank the balance. And, despite the headlines, there are still plenty of people buying and even selling homes thanks to the expanded home buyer tax credits. There are actually lots of very reliable specialized books to help you sell your home quickly.

Using the example above (you have a $300,000 mortgage and a home that’s valued at $250,000) you might sell your home and still owe the bank $50,000. You will then have to either work out a payment plan with the bank or, in some rare cases, the bank will forgive all or part of the money still owed.

Also Read: Credit Reports and Credit Scores In 2021How To Improve Your Credit Score 2021

This could, however, still be a positive way for you to save money. If, for example, you’re paying $2,000 a month in mortgage and property taxes then you may be able to sell your home and rent an apartment for $1,000 a month. Let’s say you also agree to pay off the remainder of your mortgage to the bank with a $500 monthly payment. That means that your housing costs just dropped from $2,000 a month to $1,500 a month, saving you $500!

Be aware that depending upon your situation there may be tax implications that you wouldn’t normally expect. Before selling your home you should more than likely speak with a tax expert and familiarize yourself with IRS Publication 523 – Selling Your Home. Also remember this: you still have to pay property taxes on your home even if it’s worth more than the mortgage.

The taxable value of your home is not necessarily the same as the market or “retail” value of your home. Local property taxes are based loosely on the value of your home, but most municipalities don’t adjust tax values very often, which means that when housing prices rise and fall dramatically over several years the tax value lags behind.

What To Do If Your Mortgage is Under Water
What To Do If Your Mortgage is Under Water

Foreclosure: A foreclosure occurs when you stop paying your mortgage to the bank and they, quite literally, can take your home away from you. Foreclosures destroy your credit score and remain part of your credit rating for seven years. This is an increasingly dangerous decision to make because credit scores are now being checked by employers as well as rental agencies, and foreclosure could make securing a good job or finding a place to live very difficultly.

If you are unwillingly going through a foreclosure and just think you need more time then there are detailed guides that are designed to help stop foreclosures. Going through a foreclosure is a long process and it’s not for the faint of heart. That being said, it is a viable option and if you stop paying your mortgage you should consider saving up all the money you can so that when you are eventually forced out of your home you will have some money banked away for rent or other bills.

If you are able to begin paying your bills again after your foreclosure then you can largely begin to restore your credit score in a year or two.

Foreclosure laws differ from one state to the next, so you may want to do some research or talk to a lawyer about your specific situation before you

Declare Bankruptcy: If you really can’t make the payments on your home then you may want to actually consider declaring bankruptcy. Chapter 7 bankruptcy quickly liquidates your assets, usually (but not always) including your home, and most of the proceeds are used to pay off debts. In Chapter 13 bankruptcy, however, usually allows you to keep your home and takes much longer (there is a 3 year and a 5-year plan) to pay back your debt in an orderly manner.

There are lots of rules about what you can and cannot keep in a bankruptcy case.

By having a structured payment plan to pay off other debts, you may better be able to afford your mortgage. In some cases, it may not make sense to keep your home, simply because the housing payments are still so much larger than the value of the home. That’s an individual decision and one you may want to make with a lawyer for all the details in your particular situation.

What To Do If Your Mortgage is Under Water
What To Do If Your Mortgage is Under Water

Walk Away With The Keys In The Door: Your last option is to simply walk away from your home, but even that is not as easy as it sounds. You will need to answer some basic questions to decide if you should walk away from your home. By simply leaving the keys in the door and walking away from your home you’re still technically the owner.

Eventually, the bank will have to proceed with foreclosure proceedings against you, but during that time you’ll still be racking up property tax and slowly damaging your credit more and more with each missed payment. In some states, mortgage companies can not only take your home but also sue you for the mortgage portion that isn’t paid with a sale of the house.

Your credit will still be ruined for at least a year or two and your credit report will list that foreclosure for seven years after it finalizes. You will, more than likely, have a difficult time getting a good job or finding a decent place to stay because, again, credit scores are being used for all sorts of things now.

Clearly, you have lots of options when your mortgage is underwater. There is no single correct answer for what action you should take when your home’s value exceeds the amount of money you’re paying back on a large home loan. Be sure to take your time and thoroughly research all your options with professionals before making a definite decision to pursue one action over another. Good luck!

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