If you’re a homeowner with an underwater mortgage loan or looking for ways to avoid it in the future, this article is for you. There are many homeowners across the United States that are underwater, and we want to educate you. But before we discuss how to get out of a house that is underwater, we must first learn what an “underwater” (also known as an upside-down) mortgage is. An underwater mortgage is a mortgage whereby the remaining loan balance is greater than the current value of the home.
For example, let’s say you own a home worth $200,000 with a remaining loan balance of $175,000 that you want to sell. The coronavirus pandemic causes your home value to drop (which can very well happen in the coming months), and now the current value of your home is $150,000. You’ve just lost all of your equity. So if you decide to sell your home, you’re going to have to come out of pocket thousands of dollars.
Ouch, that’s a hard pill to swallow.
But don’t panic.
There’s good news. We’ll walk you through some of your options and help you make an informed decision.
Options to Get Out of a House That Is Underwater
Firstly, you need to figure out if you’re underwater on your mortgage. Here are a few simple steps for you to follow.
- Determine the value of your home. Knowing the value of your home is the first step to determining whether or not you’re underwater. The best thing for you to do is contact a local realtor or hire an appraiser to assess the value of the property.
- Find out how much you owe on your mortgage. The easiest way is to examine your most recent mortgage statement. If you can’t find it, contact your mortgage company, and they will be able to provide you that information.
- Calculate your findings. Once you’ve collected your information, subtract your remaining loan balance from the current market value of your home.
Now that you know how much equity you have (or don’t have), you are ready to decide what to do next. Below are five options for you to choose from.
Stay in Your Home Until the Equity Returns
Staying in your home to pay down your mortgage can take quite a bit of time. Because of interest, you’re not paying down as much principal, unless you’ve lived in the home for many years. If you have extra money, you could apply it to the principal balance of your loan each month. Dave Ramsey, a best-selling author and radio host, offers his advice in an article entitled “7 Easy Ways to Pay Off Your Mortgage Early.” You can access it by clicking HERE. He advises homeowners to divide their monthly mortgage payment by 12 and pay that much extra each month. If you can’t afford to pay extra each month, set up bi-weekly payments so that you don’t have to make large lump-sum payments. Following these strategies will enable equity to return to your home, saving you thousands of dollars down the line.
Refinance Your Mortgage
Now, I know you’re probably thinking, “how can I refinance when I owe more than my home is worth?” And, you’re right, in some cases, you cannot. But there are a few loopholes. Due to the HARP program expiring on December 31, 2018, you can no longer refinance HARP-backed mortgages that are underwater. However, there is a new program called the “Streamline Refinance Program,” which enables Fannie Mae and Freddie Mac backed mortgages to qualify for refinancing regardless of loan to value percentages. Below are a few basic requirements for qualification:
- Must be a FHA insured mortgage loan.
- Mortgage must be current and not delinquent.
- The refinance results in a net tangible benefit to the borrower. Meaning, the mortgage payment drops by at least 5%. For example, let’s say your monthly mortgage payment is $1,200 (not including taxes and insurance). In order to qualify for the Streamline Refinance Program, your mortgage would have to fall to $1,140.
- Cash in excess of $500 may not be taken out on mortgages refinanced under the Streamline Refinance Program.
For more information on the Streamline Refinance Program, click HERE.
If for any reason you do not qualify for the Streamline Refinance Program, you can stay in your home until you have at least 20% equity, and then refinance. In doing so, you’ll have time to clean up your credit and qualify for a more favorable interest rate.
Sell Your Home and Pay the Difference
Choosing to sell your home under these unique circumstances can be an emotional rollercoaster ride. But let me remind you — you don’t have to. There are alternatives, such as the ones previously mentioned. Selling your home while you’re underwater will cost you lots of money and emotional distress. You’ll have to come to closing and pay the difference between the sales price and loan amount.
Here’s an example of what can happen:
Let’s say your home is worth $150,000 and you owe $175,000 on your mortgage. You’d have to come to closing with $25,000.
As you can see, just because you have this option, doesn’t mean you should do it. We recommend you consider other options.
Short Sale Your Home
A short is an option you should consider if you meet both qualifying factors: An underwater mortgage and you’re experiencing financial hardship. Investopedia defines a short sale as “when a financially distressed homeowner sells his or her property for less than the amount due on the mortgage.”
Below is a list of hardships that qualify for short sale consideration:
- Loss of job
- Death of spouse
- Job transfer
- Medical expenses from a serious illness for the homeowner or a family member
- Natural disaster
- Military service
- Reduction in pay or hours
Negotiating short sales is a complicated and time-consuming task. Generally, it takes 3 – 6 months to close, and that is why we advise you to work with an experienced professional. Fortunately for you, we are experienced in negotiating short sales, so if you need help, feel free to contact us. Our services are 100% free, and you can learn more by clicking HERE. We do all the leg work, negotiate with the lender, estimate repairs, and anything else to complete the sale. That means you only have to complete the paperwork for us to send to your mortgage company. If this sounds like your best option, we’d like to help you.
File for Bankruptcy
Last but not least, filing for bankruptcy. Although bankruptcy is available to you, we ask that you consider it as a last resort. Bankruptcy is the legal process of repaying or liquidating debts still owed to creditors. In the United States, there are five different types of bankruptcy: Chapter 7, 13, 11, 12 & 15.
The most commonly used are Chapter 7 & Chapter 13.
- Chapter 7 or “Liquidation Bankruptcy,” is the process of selling personal assets to pay unsecured debts.
- Chapter 13 or “Repayment Plan,” is the process of repaying debt still owed to unsecured creditors.
If you’re in the state of Missouri or Kansas, click HERE to get a free break down of the process. We also encourage you to speak with an attorney for additional information on your unique situation. *Please note that filing bankruptcy will have a significant impact on your credit score.*
Consult With a Professional
Knowing you’re underwater may cause you to feel hopeless and overwhelmed. We’re here to tell you there’s light at the end of the tunnel. Your situation will turn around over time. By following the advice as outlined above, you can evade financial distress and save time and money. If you need to file for bankruptcy or need assistance from an attorney for any reason, do your research first. Not every attorney has your best interest at heart.
Rather than pay an attorney, we offer short sale help if you need it. Click HERE for more information on how we can help you complete a short sale. And remember, you are in control of your situation.