Being underwater on your mortgage does not refer to having a flooded home. Instead, it means that your current debt on the house is higher than the current value of your home. Unfortunately, this situation occurs far more often than anyone wants to admit. In fact, according to Irvine, California-based ATTOM Data Solutions, in the third quarter of 2022, 2.9 percent of American homes had a combined estimated balance of loans that were at least 25 percent more than the market value.
Fortunately, those numbers have fallen dramatically in the last five years — though that offers little comfort if you are one of the nearly 5.2 million homeowners currently facing a negative equity situation in your home’s value. A condition, as it happens, that makes refinancing or selling your home extremely difficult.
These are a few options to consider if you find yourself in this situation.
One option to consider is to remain in your home rather than attempting to sell it for a probable loss. Even if you face work-related relocation, you could keep your home and consider using it as a rental property instead.
Why is staying put attractive? Like many other things in the world today, home values are cyclical. Areas that may be experiencing a slow economic state of affairs today will likely pick up and, provided the home is in a stable state of repair, improve in value in time.
If there is no critical reason to leave your home, consider remaining in your home until the market corrects itself and home values improve. You may even consider making improvements to your home during this time that will help to increase its value once you decide to put it on the market.
Selling Your Home
For some people, the only option is to sell your home. For example, you may be facing a relocation and need to get out of the financial obligation your home represents. Alternatively, you could be at risk of foreclosure and trying to salvage your credit. Some options are available that may allow you to sell your home even if it is underwater. However, they are not guaranteed and may come at a higher price than you want to pay.
- Short Sale. Under a short sale, the lender allows you to sell your home for less than you owe, and they agree to accept the resulting proceeds as satisfaction for your loan obligations. Since lenders lose money on the short sale process, it is often considered a last resort before foreclosure. However, some lenders will agree to allow you to sell the home for less than you owe to avoid the foreclosure process.
To be considered for a short sale, you must be able to prove to the lender that you are no longer able to make your monthly payment obligations and have no foreseeable means to catch up on payments if you have fallen behind. Your lender is the one that will make the ultimate decision as to whether to accept a short sale offer.
- Strategic Default. If you believe home values in your area will never recover, then it may be more strategic to stop putting more money into the home and walk away from it – even if you can afford to continue paying your mortgage. There are great debates over the ethics of this, and it has a lasting effect on your credit score (seven years) as this ultimately leads to foreclosure.
- Deed-in-Lieu of Foreclosure. Some call this surrendering a home to the bank rather than going through the foreclosure process. The benefits of this are sometimes negligible unless you are certain the agreement specifically releases you of further liability from the loan by secondary lenders or agencies. These are also not guaranteed and will negatively affect your credit score.
While none of these are entirely attractive options, they are options to consider and maybe the best option for you, depending on your tax and property situation.
Sometimes foreclosure becomes the only option available to you. When this occurs, the lender retakes control of your home, and you get evicted. This process can take a huge emotional toll on you and your family, as well as a financial toll on your credit situation for the next seven years. In addition, the foreclosure process allows the lender to sell your home as quickly as possible to another buyer to help recover their losses. If you can avoid this process, it is best to do so from an emotional perspective. However, it is sometimes an economic necessity.
Bankruptcy is another option to consider when facing an underwater home. There are two types of bankruptcy you may qualify for in this situation:
- Chapter 13 Bankruptcy. This type of bankruptcy allows you to protect some of your assets while you restructure your debt so you can repay some or all of it.
- Chapter 7 Bankruptcy. With this type of bankruptcy, the courts sell your assets to help you repay your debts. You will lose most of your assets in the process, including vehicles and homes, but your remaining debts become forgiven.
Bankruptcy has a lasting effect on your credit score and can be an exhausting process both mentally and emotionally, not to mention expensive.
It’s not easy knowing the right move to make when dealing with an underwater mortgage, but understanding your options helps.