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How to Get Out of an Underwater Mortgage

The situation of an underwater mortgage normally occurs when the housing market comes crashing down. This Buzzle article will tell you how to get out of an underwater mortgage.
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Way to get out of an underwater mortgage
"You are entitled to have the PMI canceled automatically as soon as your mortgage balance falls to 78 percent of the original value of your home - the purchase price. You are entitled to that regardless of how much your home may have fallen in value, or how far underwater you are on your mortgage."
― Andy Wilson, spokesperson, Fannie Mae
A mortgage is a term used by real estate dealers to collect capital to buy the property in question. This means that when a property is mortgaged, it is done on the borrower's loan. Therefore, in the event that the borrower fails to pay off the debt or if he defaults on the loan, the lender can take possession of the mortgaged property and initiate a foreclosure.

When you owe more on your mortgage than your home can command on the real estate market, you are 'underwater'. During the real estate meltdown of the late 2000s, many U.S. homeowners faced this problem. In this Buzzle article, we shall brief you about certain strategies of underwater mortgage protection.

The Theory Explained
  • Suppose you have purchased a home for some amount. Suddenly, if the housing market crashes and the balance of your loan is higher than the fair-market value, you are said to have an 'underwater mortgage'.
  • In this case, you will not be able to sell your house because buyers generally pay only market values. This makes it impossible to sell your home in case you are not able to pay the mortgage anymore, or you have lost your job, etc., unless you pay the remainder from your own pocket.
  • Thus, underwater mortgages can leave the owner high and dry, since he will be left with more debt on his house that what it would currently be valued in the market.
  • This kind of a situation means that he would be unable to sell his home, and ultimately it results in a foreclosure.
  • Homeowners are also unable to refinance the debt or obtain a new loan. The latter comes into play if the current value of the property is not a sufficient security for a new loan.
  • For example, let's say your mortgage is USD 400,000, but the market value of your home is only USD 350,000, your mortgage is USD 50,000 more than the value of your home. In this case, your mortgage is underwater.

Available Options

Try to Refinance
You can seek assistance from government-backed programs. Two such important refinancing options include HARP and HAMP.

You can refinance your loan through the federal Home Affordable Refinance Program (HARP), if you meet the required criteria. This program allows refinancing for eligible borrowers up to more than 100% of the home's value. However, not every loan qualifies for this program. This certainly does not apply for homeowners having a negative equity. The first rule that applies here is that your property should not be eligible for a foreclosure, i.e., even one late payment in the last 12 months will disqualify you from this program. Rule two, either Fannie Mae or Freddie Mac must own those loans. If not, you do not qualify for the loan. Other factors include the finance structure of your current home, your payment history, and your credit score.

If you have an underwater mortgage along with missed payments, you can qualify for the federal Home Affordable Modification Program (HAMP). To meet the eligibility criteria, your loan must be owned by Fannie Mae or Freddie Mac. Also, you need to mention what financial hardship you went through, due to which your mortgage is in danger.

Go in for a Foreclosure
A foreclosure can severely affect your credit history. Also, if the property is not foreclosed on its own and you walk away from the situation, it would be very difficult to get the bank to take away the house, because legally, you are still responsible for it. It could lead to unpleasant financial situations. Once it is foreclosed, you are virtually left with no proper place to live and a bad credit score.

Conclude a Quick Sale
Speak to your lender. If he agrees to your selling of the house for a lower price than what you owe on the mortgage, you may scrape a decent deal. Do this only if you have a well-read and understanding lender, else lenders are not the ones to let you get away so easily. And before doing so, consult a property attorney and a tax professional. Both can advise you on issues about the sale as well as the taxes on the debt, respectively.

Pay the Mortgage
This can be a slightly sensible, yet foolish option. What you will be doing here is paying the money despite not being able to afford it. Technically, this belies the very situation of underwater mortgage, but then, there have been cases where people keep sending mortgage checks. This does not make a lot of sense, especially in the long run. Also, if maintenance and repair expenses arise, that is a different ball game all together. If you have a generous relative or you win a lottery all of a sudden, you can choose this option. But the possibility is quite far-fetched, don't you think?

Modify the Loan
In this case, your lender may agree to lower the interest rate and payments, either temporarily or permanently. In case your payment is more than 31% of your monthly income and you have also had a financial setback, you may be eligible for a loan modification under the Home Affordable Modification Program. Your lender might have a strategy of his own as well. This process can be time-consuming. In fact, some programs may actually lessen the principal, that means you still come under negative equity. Also, if there is a reduction in the principal, you might have to pay taxes on that amount. Depending on how the modification is reported by the lender, it could also affect your credit score.

File for Bankruptcy
This is the last option. However, it will not erase your mortgage loans. It may allow you to catch up on payments without interest, but it will not stop your payments all together. In such a scenario, it would be advisable to consult a bankruptcy lawyer.

If you ever fall into this critical situation, get some underwater mortgage help from the options mentioned above. Of course, opting for a foreclosure and bankruptcy are not exactly points that help, but if you really are in a bad shape, you may have no choice. Do not make a hasty decision, these things need to be thought over and planned carefully. It is highly advisable to make proper financial plans and accumulate savings and prevent this problem from occurring.

Disclaimer: This article is for reference purposes only and does not directly recommend any specific financial course of action.
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Published: August 21, 2014
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