The Perfect Storm: What to Do if You are “Underwater” with Bad Credit and No Money
Homeowners on Long Island and in the five boroughs having trouble meeting their mortgage payments may feel they have no choice but to stay put and wait for the feared foreclosure auction notice. This is especially true if their house is “underwater” where they owe more to the lender than they would get if they sell. Very often, homeowners in financial distress have poor credit scores and little or no money for relocation.
If you are in this situation, you are not alone. But don’t despair. There is a reasonable way out to avoid foreclosure.
Are you Underwater?
If you are feeling the stress of meeting monthly mortgage payments that are too high, you probably want to move to a more affordable home. But when you bought your house you signed a mortgage agreement and banks will want their money when you sell. If your house will not produce enough in the sale to pay off the mortgage balance, you are said to be underwater.
Do the Math
Homeowners often end up underwater if the real estate market drops, if they take out a second mortgage or home equity loan, or if back payments, fees, interest and other charges start adding up. To figure out if you are underwater, you need to find out how much you owe the bank or other lender and determine how much you are likely to get if you sold your home.
How much do you owe?
You can find out approximately how much you still owe on your mortgage by looking at your most recent statement and finding the unpaid principle balance. This figure is the loan amount that is unpaid, but it does not include other charges like interest or late fees. Contact your mortgage service provider, the company you pay monthly, for an exact figure. Through them, you can order a “pay-off” from your bank which will provide you with exact figures of what is owed in total. Also, remember to include all mortgages when you determine how much you owe.
How much is your home worth?
The next step is to determine how much you can reasonably expect to get if you sell your house. You need to find out the current market value of your property. A local real estate agent can prepare a CMA (Comparative Market Analysis) for you that lists homes like yours that have recently sold in the neighborhood. For a more exact figure, hire an appraiser. The location, square footage, number of bedrooms, amenities and other specifics will impact the value of your home.
Find out if you are underwater
Now you have to subtract your current mortgage debt including charges and fees from the current market value of your home to find out if you are underwater. If you get a negative figure, you owe more than the property is worth. For example, if you owe the bank $300,000 and your home is only worth $250,000, you are underwater by $50,000.
Current Market Value ($250,000) minus Mortgage Debt ($300,000) = negative $50,000
Refinancing or Modifying your Loan with Bad Credit
You may hope that you can refinance or ask the bank for a loan modification, but a refinance may not be possible and a loan modification may not be advisable.
If you owe more than your house is worth, you obviously have zero equity in your home. Banks typically require at least 20 percent equity to issue a new mortgage, so if you have bad credit and no money to put into the home, refinancing and staying in place to wait until prices go up is not an option for you.
- Loan Modification
In a loan modification, your lender replaces your original mortgage with a new one. Banks are notoriously difficult to deal with if you are seeking a loan modification. Even if you can get them to agree, upon closer scrutiny you may find that you will end up in a worse financial situation with a loan modification than before. This is true even if your monthly payments are lower.
Think about it. If the bank extends your payments to 40 years, how much will you end up paying for your house in the long run? Chances are you will wind up owing much more than the house is really worth.
Relocating with No Money
After careful thought, you may come to the conclusion that moving and relocating is the best solution, rather than fighting to stay in your home. But how do you move if you are underwater, have bad credit and no money?
A short sale may be a good solution. In a short sale the bank takes the loss and agrees to accept a sale of your house, even if the sale does not yield enough to cover what you owe. You will have control over your timeline, so your children can finish out the school year and you will have some time to save up for the move. In many cases it makes sense to move to a new home with a rent-to-own agreement so you can accumulate the equity you will need to obtain a mortgage when you buy the home. In some cases, you will be able to receive money from the bank or another source to help you with relocation.
Getting Help within New York City
Realty Warehouse can help if you are underwater, have bad credit and or no money to move. We specialize in helping homeowners avoid foreclosure on Long Island or in the five boroughs of New York City. Our representatives help homeowners weigh their options, find alternatives to foreclosure such as a short sale and achieve the best possible outcome. Realty Warehouse enjoys an A+ accreditation rating from the respected Better Business Bureau. You can count on us to listen to your situation, offer the advice you need and provide effective alternatives in a stressful situation.
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Call, click or chat with Realty Warehouse for a 10 minute consultation that can change your life.
This blog is for informational purposes only, subject to change.