Is your house, condo, or apartment worth less than you owe on it? You’re not alone. About 28% of homeowner mortgages nationwide are “underwater.” You may feel like you have few choices, but in fact there are several options for dealing with an underwater home.
1. Do Nothing.
If you like your home, can afford your mortgage payments and have no pressing need to relocate, then your best option is to just stop obsessing about market value. The real estate market changes very rapidly, so a house that seems hopelessly over-valued today may look like a good deal tomorrow. The longer you own a home, the likelier you are to be able to sell it at a profit, so settling in for the long haul is always a good idea if you can manage it.
2. Get A Roomie.
If you can’t afford your mortgage payments and want to stay in your home, try and find ways to create an income stream. Getting a roommate is one obvious choice, but there are many ways to make extra money from real estate. Can your spare bedroom function as someone’s office? Can your garage serve as a storage facility?
3. Rent And Go.
Step 1: Find out how much rent you can expect to get for you home.
Step 2: Find a rental unit with substantially lower rent and move there.
Step 3: Rent out your home at the prevailing market rate. It might not be enough to cover your mortgage but the difference between what you pay in rent and what you receive should help you cover your mortgage payments.
4. Check Out FHA Short Refinancing.
This is a brand new federal program (detailed more in our post on the topic) specifically designed for homeowners who can afford to pay their mortgages, but whose homes have lost value. If your bank participates, it may write down the value of your loan to reflect your home’s current value. To qualify, you will need to be current on your payments, be able to demonstrate that you have the income to pay the loan and have a credit score of at least 500, among other restrictions. To learn more, talk to your mortgage lender or go to the FHA website.
5. Ask For A Modification.
Even if you don’t qualify for the new FHA program, your bank may be willing to work with you to modify your loan payments so that you can afford to stay in your home or even to forgive part of the loan.
6. Negotiate A Short Sale.
If you can’t stay in your home, then your best answer may be a “short sale,” in which you obtain the bank’s permission to sell your house for less than you owe. If your house is only slightly underwater, the bank may forgive the difference between the selling price and your outstanding loan. But if the difference between your mortgage and the selling price is great, the bank may still expect that you repay all or part of that shortfall. It might sound like you’d be no worse off simply letting the bank foreclose, but in that case you would be even more in the red, as the bank will expect you to repay its legal fees, and will likely sell the home for less than you could have.
7. Give Your Home To The Bank.
This won’t work in every case, but depending on the terms of your mortgage, you may be able to negotiate a “deed in lieu” of the loan, which means that the bank takes your house but forgives the rest of your loan.
Caution: If you plan to try negotiating any sort of alteration with your lender, first get advice from a knowledgeable real estate attorney. Most of these programs have negative consequences for your credit rating and will affect your future borrowing ability, so it’s smart to have someone on your side to help you evaluate your options.