Monday, March 14, 2011

Underwater Mortgages

This is a guest post by Luke Erickson the editor from Idaho's Two Cent Tips.

Underwater Home: What Should You Do if You Owe More on Your Home than It's Worth?Recent estimates indicate that about one in every four Idaho homes is currently underwater. Well, it has been snowing a lot lately . . . You don’t have to boo me for that one, I’ll do it myself. The term underwater really  refers to the instance when the amount you still owe on your mortgage is more than the current market value of your home. How can I joke about this topic—especially with such a lame joke? Well the lame part just comes naturally, but I can joke a little about this very serious topic, because for most people with underwater
homes, there is still hope.
Following is an article that illustrates the possible options you might choose from if you find your house underwater.
Stay put
Don’t panic if you hear that you’re “underwater.” All that means is that you would lose money if you sold RIGHT NOW. But unless you absolutely must move right now, you may be able to recoup some or all of that lost equity. Additionally, consider renting your place out. Even if you have to rent your house out at a small loss each month, you may still be better off than any other alternative. Some lenders will work with you to renegotiate the rates and terms of your mortgage, whether you’re in a financial pinch or not. This sort of informal “in-house refinancing,” is fairly new, but some lenders (the smart ones, in my opinion) are working with their borrowers to avoid foreclosure and loss of current customers. 
How to Sell a House When It's Worth Less Than the Mortgage: Options for "Underwater" Homeowners and InvestorsNegotiate an exit plan
But, if you simply can’t stay put -- Your family no longer fits within the confines of your once spacious two bedroom house, you land a much better job in another part of the country, or your adjustable rate has become unaffordable, the next option is to attempt to negotiate an exit plan.
A short sale is an agreement between you and the bank that you will make every effort to sell your house for as high a price as possible – no big deal, this is something you would do anyway – and in return the lender will accept the sale price as partial payment of your debt and forgive any debt for which you fall short. Hence the term, “short-sale.”
A deed-in lieu is also an agreement with your lender, in which you simply hand them a deed to your residence
with the understanding that you owe them nothing, or at least a reduced amount on the remaining balance, once the lender sells that house. These are forms of proactive foreclosures, if you will. Remember, any such agreement must be in writing to be valid.
As far as your credit is concerned, a short sale, deed-inlieu, or foreclosure will all have similar effects on your
credit score, reducing it by as much as 300 points, de-pending on how your lender reports it to the credit bureaus.
Lender won’t negotiate?
If your lender won’t negotiate, and you must leave your house, there are basically two options. Bankruptcy is a step to either liquidate your assets in return for forgiveness on your loans, as in a chapter 7, or is a legal
restructuring of your debts so that you can afford the payments, as in a chapter 13. Neither option is pretty, and will destroy your credit for up to 10 years.
Bankruptcy makes the most sense when you have additional unaffordable debt besides the mortgage. Or, just walk away - though this option has received lots of media coverage, and sounds pretty simple, it can be  anything but. Walking away essentially means mailing the mortgage company your keys, and leaving your  residence never to return. You may never hear from your lender again. But, on the other hand, in some states,  your lender can still legally come after you for the difference you still may owe after they sell the house. This option will have the same effect on your credit score as a foreclosure.
Which of all these options is the right one? That’s sort of like asking whether it’s best to be punched in the gut or the face. Either way it’s going to hurt. But, I’ve always believed that those who try to do the right thing, whatever that may mean in this situations, will eventually be rewarded for it.

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