Mortgage Options for Underwater Homeowners

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Mortgage Options for Underwater Homeowners

Homeowners often find themselves in the unfavorable situation of owing more than their houses are worth on the amount of their mortgages. A number of factors, many of which are beyond of a homeowner’s control, contribute to this. Falling property values, a failing area, poor borrowing choices (such as taking out a mortgage with an option adjustable rate or borrowing more than the borrower can pay), and refinancing to take equity out may all result in homeowners’ debt increasing. The homeowner is said to be “upside-down” or “underwater” when the mortgage debt is more than the value of the house. There are ways to get out of this awkward situation, however they often involve selling the house for less than the loan’s worth. Let’s examine a few choices available to homeowners who have negative equity.

Short Selling a Home That’s Short on Equity

If there is no room for negotiation or the seller has substantial financial resources, short selling may be an alternative. The homeowner may show up to the closing with a cheque to settle the loan debt if a buyer can be located. The seller must speak with the mortgage holder and make efforts to negotiate a short sale if they are unable to pay off the amount but still need to sell.

It sometimes takes a significant amount of time and documentation to persuade the lender to approve a short sale. The homeowner next has to identify a real estate agent who is willing to manage the transaction after gaining the lender’s approval. If a buyer is located, the difficulties persist. Frequently, the lender manages the loan on the investor’s behalf. If the lender is happy with the sale, an agreement must be reached with the investor who is holding the loan if the lender is not. It could take some time. The insurance company may also be engaged if the residence has private mortgage insurance (PMI). The insurer has a stake in the outcome since it has guaranteed the assets against default to safeguard the bank’s interests. In general, it takes a long time to get to an agreement, and the bank isn’t really motivated to help.

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Ultimately, the homeowner may still owe the bank money even after the sale in order to cover the gap between what a buyer is ready to pay and what the bank would accept. The alternative may be foreclosure if you believe this to be the case in your circumstance. Consider this choice carefully, however, since a foreclosure is worse for your credit rating than a short sale.

Taxes must be taken into account in addition to the difficulties of organizing the sale, the potential for outstanding debt after the sale, and the risk that your credit score would suffer. The difference between the home’s selling price and the remaining mortgage debt might be considered income for tax purposes. Since a short sale is seen as debt forgiveness from a tax viewpoint, you must either pay the tax or provide evidence that you were bankrupt and hence exempt from paying it.

There are few ways to avoid the headaches of a short sale. The ideal situation is to keep living there and making mortgage payments up until the housing market rebounds and the property can be sold for a sum that pays off the remaining debt. Other choices to think about include moving into a shared apartment and renting out the property or getting a roommate to assist with the payments.

The Bottom Line

Take out the cheapest mortgage you can find and pay it off as early as you can to reduce the likelihood that you will end up in the negative. This process starts with buying a house that you can really afford, which could be a quite different home from the one where you feel most at home.

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Smart, cautious purchasers put down a sizeable amount of money, allowing them to avoid having to acquire private mortgage insurance (PMI), and building up enough equity in their homes to provide them a safety net in case property prices fall. You should also be able to make additional payments and pay off your debt faster by taking for a modest mortgage. Last but not least, increasing your payments greatly reduces the probability that you may end yourself “upside down” on your mortgage.

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