In this article, you will find solutions for upside-down mortgages.
Staying the Course
Home values rise and fall according to trends in investment and economic and market conditions. If you can stay in your home and continue to make mortgage payments, this is the least problematic and best way to reverse an upside-down mortgage.
Your home’s value has a good chance of rising. At the same time, there is also a good chance it could decrease or not rise at all. In any case, continuing to make payments pays off the interest on the loan and begins to pay down the principal, which starts to bring the mortgage back to normal.
You might also make some improvements that will increase your home’s value, such as updating the kitchen and bathroom (if you are able to).
Principal Reduction
Another good solution for your upside-down home is to bring it back to normal through a principal reduction program.
The problem with this option is that the bank must forgive a portion of the mortgage debt that is not covered by the value. Not all banks will do this, but it’s worth asking.
It might seem logical for the bank to refuse a principal reduction because it may want to pursue a short sale, which also involves forgiving the debt. At the same time, you may wonder why the bank wouldn’t forgive the debt for you as a borrower who is making timely payments and is in good standing with the bank instead of a third-party buyer.
This would be an excellent question to pose to the bank if you try to negotiate a reduction deal.
Short Sale Solution
A short sale is perhaps the best financial secondary option, after a principal reduction.
A short sale eliminates the mortgage debt, and will allow you to eliminate mortgage obligations, at least in some states. The bank agrees to let you sell your home at its fair market value, even if that value is less than your loan balance.
A short sale can be less costly for the bank than legal proceedings for bankruptcy.
There are many different types of short sales, so talk to an experienced short sale agent to find out which one is best for you. An experienced agent’s expertise can make the difference between getting cash for a short sale or having the bank completely deny your short sale.
Loan Modification
Your bank may prefer to modify your mortgage. This can lower the monthly payments, but will extend the term of the loan to compensate. This method is typically used by homeowners who want to keep the home they have, regardless of how much money they spend on it in the long run.
Typically, homeowners who choose this path are employed and can afford the monthly payments. However, they are paying more than one-third of their total monthly income, prefer to keep the home, and want to find a way to reduce their payments.
Refinancing Solution
The federal government established a program to assist housing after a significant drop in home values following the financial crisis from 2007 to 2009. It’s called the Home Affordable Refinance Program (HARP), and it has helped over 3.5 million homeowners refinance their loans from Fannie Mae and Freddie Mac. However, the program expired in December 2018.
Fannie Mae and Freddie Mac designed alternative programs for upside-down homeowners. The Freddie Mac Enhanced Relief Refinance Program allows homeowners with Freddie Mac loans or loans that were not refinanced through the HARP program before December 31, 2018, to refinance their homes.
Offers
Fannie Mae is a high-value refinancing option for homeowners who are underwater as well. Only loans backed by Fannie Mae can be refinanced, and they must have a note date of October 1, 2017, or later.
Most borrowers who apply for refinancing do so because they want to keep their homes and lower their monthly payments and interest rates.
The main drawback is that refinancing does not reduce your principal balance, and you will need to obtain a loan that is backed by the government. Mortgages are typically not refinanced through banks if they are underwater – most banks require equity in the home to approve the loan.
Strategic Default
Strategic default on your mortgage may seem like a good idea at first. It’s easy to become exhausted after trying to work within the bank’s system, only to fail to resolve an issue that wasn’t your fault. Many disgruntled and angry homeowners tend to stop making mortgage payments and send the home into foreclosure.
You might think you are “stressing the bank” by doing this, but you are likely only harming yourself. Your credit score will be affected, the bank will proceed with foreclosure, and you may have to wait seven more years before you qualify for a mortgage again. Strategic default is an option, but it’s not a very good one if you need your credit score.
Giving the Home Back to the Bank
You cannot give the home back to the bank because the bank never owned it in the first place. The bank may take possession of a foreclosed home, claiming the collateral for the loan, but it doesn’t regain ownership in the literal sense.
Sometimes banks offer homeowners the option of transferring ownership to them. This process is called “deed in lieu of foreclosure.” You are essentially saying, “I will not make any more mortgage payments, but you don’t have to foreclose because I will give you the ownership.” This agreement is often in the bank’s favor but rarely in the owner’s favor. Your credit score will be affected, and you are unlikely to end up with anything more than you would have received if you had defaulted and gone into foreclosure.
Bankruptcy Solution
Bankruptcy should be a last resort that you consider (or should consider), especially if your underwater home is the only financial issue you are facing. However, you might think about filing for bankruptcy protection if your other debts have spiraled out of control and you urgently need some financial relief.
Filing for Chapter 7 bankruptcy “discharges” remaining debts after the trustee takes ownership of any non-exempt property you own and sells it to pay off as much of what you owe as possible.
Chapter 13 bankruptcy involves entering into a multi-year payment plan to repay your debts under court supervision. The terms are typically better than what you are currently struggling with.
You are more likely to lose your home in a Chapter 7 proceeding, but you may be able to save it in Chapter 13 bankruptcy. This is because your mortgage payments are usually included in your payment plan.
Was this page helpful?
Thank you for your feedback! Let us know why!
Sources:
Federal Housing Finance Agency. “Home Affordable Refinance Program (HARP).” Accessed on January 28, 2021.
Freddie Mac. “Enhanced Relief Refinance Mortgage.” Accessed on January 28, 2021.
Fannie
May. “High-Value Refinance Option”. Accessed January 28, 2021.
U.S. Courts. “Chapter 7 – Bankruptcy Basics”. Accessed January 28, 2021.
U.S. Courts. “Chapter 13 – Bankruptcy Basics”. Accessed January 28, 2021.
Source: https://www.thebalancemoney.com/what-to-do-with-my-upside-down-house-1799156
Leave a Reply