When the housing market drops, you owe more to the bank than the house is worth and you are struggling to meet your monthly mortgage payments, your first instinct may be to stay and fight to keep your home at all costs. Your house may have been in the family for years, your kids may be in school and you probably have strong roots in the community. So what can you do if you live on Long Island or in the five boroughs and you are “underwater” and owe more than your house is worth?
These are the four common options to consider when you owe more on your property than it’s worth and you are at risk of foreclosure:
Stay put and keep your home
Seek a loan modification
Sell the house in a short sale
Walk away with a deed in lieu
Refinancing is not an option, because without equity in your home the value of the property does not provide security for a new loan.
Option 1: Stay Put and Keep your Home
If you can afford your mortgage payments you can stay where you are and hope the housing market changes for the better. Some people continue to pay their mortgage even though it will take years for the market to improve to the point where the value of the house is greater than the amount they owe on their mortgage. If you are underwater and have credit issues, you can speak to a HUD (US Department of Housing and Urban Development) representative for credit counseling. You may then decide to ride out a down market, meet your obligation to pay off your mortgage and stay in your home.
Option 2: Seek a Loan Modification
Refinancing your mortgage to make your monthly payments more affordable is not an option, but you may seek a loan modification although it can be difficult to get the bank to agree. A loan modification changes the terms of your existing mortgage and may reduce the interest rate on the loan, extend the term and or change an ARM (Adjustable Rate Mortgage) with an increasing interest rate and a balloon payment at the end to a Fixed-Rate mortgage. However, a loan modification may not be your best option if the bank offers you a bad deal where you would have a lower monthly payment in exchange for paying much more than the house is worth because of an extended term of the loan, sometimes up to 40 years. The Fannie Mae Flex Modification program may offer some relief to qualified applicants.
Option 3: Sell the House in a Short Sale
People who are underwater with their mortgage often find that it is in their best interest to sell their house to avoid foreclosure. In a short sale you get the bank’s approval to accept a lesser amount than what is owed as payment in full, and the bank forgives the difference. A short sale is handled as a common real estate transaction where you deal with a real estate agent and you maintain control over the timeline of the sale so your children can finish out the school year. Your credit score takes less of a hit than it would in a foreclosure. With a short sale, you can move to a new, more affordable situation and make a fresh start in life. As an added bonus, you may be able to receive money for relocation.
Option 4: Walk Away with a Deed in Lieu
Another option to avoid foreclosure when you are underwater is to walk away from your house in a deed in lieu transaction. With a deed in lieu, you hand over the keys to your house to the bank, and in exchange the bank releases you from the mortgage obligation. Keep in mind that with a deed in lieu you may be responsible to pay tax on the deficiency balance which is the amount of the mortgage that is not recovered. This is the case if the bank reports the portion of the loan balance that is forgiven as income.
Weighing your Options
If you owe more on your home than it is currently worth, you have a decision to make. If you can afford to stay, think about whether or not you really want to put money into what used to be an asset – your home – that has depreciated and now may be more of a liability. Or, you can sell and move on. While it is impossible to see into the future, think about the chances that the house will regain its market value any time soon. If it won’t, it may not make sense to stay. If you are underwater and struggling to make your mortgage payments you can try for a loan modification. Banks are known to be reluctant, but if you qualify you may be able to get a loan modification through the Fannie Mae Flex program.
Walking away by providing the bank with a deed in lieu is another option, but a short sale is a far better choice for most homeowners. With a short sale you and your family can stay in the house during the short sale process so you are buying time to create your plan, have the children finish out the year in school and save up for relocation. You may be eligible for a relocation incentive from the bank or another source to help with moving expenses.
Realty Warehouse No-Charge Short Sale Services
Realty Warehouse helps underwater homeowners who live on Long Island and in the five boroughs of New York City and may be facing foreclosure. We specialize in helping homeowners like you find alternatives to foreclosure and achieve the best outcome. Realty Warehouse enjoys a coveted A+ accreditation rating from the prestigious Better Business Bureau for working with hundreds of homeowners to help them when they are in financial distress. You can count on us to offer the advice you need and provide solutions for a stressful situation.
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This blog is for informational purposes only, subject to change.