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How to Escape an Underwater Mortgage

By on September 14, 2012 in Mortgage

How to Escape an Underwater MortgageThere are few financial things worse in life than needing to sell your home, but having the home’s value be significantly lower than your mortgage balance. This is called being underwater on your home or mortgage. An underwater mortgage means you are going to have some issues getting out of the house, and to be frank the options are not all great.

How to Get Out From an Underwater House

Here are four different ways you can escape a home that is seriously underwater in terms of loan to value.

Do a Short Sale

Your first option is to simply try and do a short sale on your home. A short sale is when your bank agrees to wipe out any remaining balance of your mortgage above whatever offer you have received from a potential buyer.

As you might expect, your bank isn’t going to be fond of this idea. They will be writing off thousands of dollars of your loan which will hurt their loss reserves.

However, a short sale is often better than a foreclosure for the bank for several reasons. First, the foreclosure process can take months because of the number of homes that need to be foreclosed on. If they foreclose on you today and you move out of the home, they know have to worry about maintaining the property during the foreclosure process or risk the value of the home going down even further. Lastly, it makes a lot of sense for banks to accept a short sale in lieu of a foreclosure because there is already a willing buyer ready to buy the home. That means it won’t have to sit on the bank’s books as an asset needing to be offloaded.

Of course to do a short sale you will need a willing buyer, which means you need to clean up the home, put it up for sale, and deal with the hassle of getting short notice for showings on the property.

Apply for Government Mortgage Assistance to Refinance

What if you want to stay in your home but the payments are going to bankrupt you or you can’t find a buyer to do a short sale? The government has instituted programs like Making Home Affordable which consists of 12 different programs targeting specific groups of people. For example, one popular program is called HAMP: Home Affordable Modification Program. If you qualify, HAMP can significantly reduce your mortgage payments back down into a range that you can then afford.

Even if you are skeptical as to whether you will qualify for mortgage assistance from the government, it can’t hurt to look into the option if you need it.

Become a Landlord

If you absolutely need to move (perhaps you received a job offer in another city or state) then you will be vacating your home. Instead of choosing to lose all of your equity and then some through a short sale or foreclosure, you do have one more option. You can become a landlord.

This leaves your equity in place which means you won’t lose any money, but you also don’t have any extra money to take with you to rent out a new place to live. It’s a double-edged sword. If you can’t afford to move without getting some equity out of your home, you may run into problems.

Being a landlord isn’t the easiest choice, either. Vetting tenants and doing showings of the property can be time consuming, and renting out your residence is a huge task with a lot of potential liability. Relying on a property management company to deal with all of the problems of being a landlord can help, but comes at a steep cost in both an upfront fee and a monthly charge as a percent of rent.

Nonetheless, renting your home is an easy way to avoid wiping out all of your equity by doing a short sale or being foreclosed on. It won’t be the easiest option to maintain unless you have a property management company, but it does keep your losses on paper rather than in reality.

Face Foreclosure by Walking Away

Lastly, you can walk away from your home.

This isn’t highly recommended, but in some cases it is inevitable. If you have lost a significant portion of your income, can’t qualify for a home loan modification, can’t rent out the home, and can’t find a buyer for a short sale then you are probably going to end up in foreclosure.

A mortgage is a contract. The bank agrees to take ownership of the property if you don’t make payments. You agree to make payments or forfeit the property. Since it is a contract, utilize your portion of the contract and hand over the keys to the bank. Do it politely, don’t trash the home, and walk away. You will experience a serious credit hit and a lot of phone calls over the next 12-18 months, but it is a definitive way to get out from an underwater mortgage.

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