How to Deal with an Underwater Property?
November 29, 2017
A “seriously underwater” property means that the total loan amount secured by the property is at 125% of the property’s current market value. As of Q1 2017, 5.5 million U.S. properties are seriously underwater. This number was 6.7 million in Q1 2016. Among top five metropolitan statistical areas with seriously underwater homes McAllen, Texas stands at 3rd position with 7,746 more underwater properties (Source: ATTOM Data Solutions). So as a whole situation is improving and although on a country-wide level underwater property ratio is decreasing. However, in McAllen, the situation has not improved yet.
Let us explore your options from the least effective to the most challenging.
1. Pay the Mortgage
Your first option is to do nothing and continue paying the mortgage as usual. Doing nothing is one of the most comfortable options. You have your home, you pay your mortgage, and you avoid any credit and foreclosure issues. The only downside is that your payment most probably will never bring a return. If you can afford that and other life challenges are more important to you, then this is your way.
2. Refinance the Home
Refinancing is your second option. If you want to change mortgage installments, then this is the way to go. There might be a program available to your help. If you have FHA loan, you can refinance it through “Home Affordable Refinance Program” (HARP) program.
Introduced in March 2009, the current end date to get a HARP refinance is December 31, 2018. (HARP http://www.harp.gov/About ).
As mortgage rates are low at the moment so if you refinance your mortgage, your monthly installment may decrease considerably. Refinancing will not reduce the principal amount, but the lowered interest rate will be a good saving. The downside is the refinancing will cost you time and money.
3. Apply for a Loan Modification
You can request a mortgage modification in some cases. For example, FHA has “Home Affordable Modification Program” (HAMP). If successful, it may reduce your monthly installments by 30%-40%. Many other lenders have their modification programs available. There is no right or wrong answer. It is about matching your condition to the best possible option available. Loan modification application can take several months to approve.
4. File for Bankruptcy
In extreme cases, filing for bankruptcy makes sense. If you cannot pay the mortgage and you do not have other assets you can take this route. It is not the smooth path because you will lose the house, your credit score will go down, and you will not be able to get a new mortgage anytime soon and, bankruptcy laws are stringent now. However, if your property is underwater and you have difficulty in paying monthly installments, then this is a viable option.
5. Strategic Default
If the property is severely underwater and you do not have money to solve the problem you can simply walk away from your mortgage through foreclosure. The lender will take your house, and you will be debt free. It will seriously hurt your credit score. If not done carefully you may face deficiency judgment. Emotionally foreclosure is not an acceptable option. You should try to avoid it if possible.
6. Short Sale
Having explored all possible options a well-executed short sale can be a very method to get rid of your mortgage and avoid issues also.
Side effects of a poorly crafted short sale might be tax notice, credit damage and deficiency judgment to name a few. A short-sale is better than a foreclosure because your credit score recovery period will be much quicker as compared to a regular foreclosure.
Summary
Your situation, market conditions, and the policies of your lender will determine the best course of action.