Your Home is Underwater; How Do You Keep Treading?

Seven states contain 64% of the homes that are ‘underwater’ on their mortgages. And, Georgia in one of the Lucky Seven.

Anectdotally, I have seen it in some half the cases of folks who want to refinance and have not been able to do so. And most of those homeowners want to refinance because they have an adjustable rate mortgage that has recently adjusted – or is about to adjust higher. And they are sort of stuck. Not much to do.

Are there any options?

Sure there are; but none are easy nor perfect. But the options that I can see thus far are:

Short Sale: You put the home on the market and negotiate with the note-holder (the bank) to accept a purchase offer which is less than the amount owed on the note as payment in full. Often times this is not done except in cases where the borrower can demonstrate hardship, or the lack of ability to pay the mortgage on time. It takes quite a bit of documentation, since it is almost like reverse qualifying for a mortgage – or proving that you do not qualify. Caution: This could hurt your credit by showing up on your credit report the same as a foreclosure. If you take this route, you want good council beside you: a good lender, a Realtor who understands short sales and a closing attorney willing to work with you to accomplish your goals.
Loan Modification: In a Loan Modification, you contact your mortgage servicer (the bank) and ask them to ‘modify’ your loan – lower your interest rate, extend your payment terms or lower the principle amount owed on your loan, or a combination of the three. Often you have to ‘reverse’ qualify for a loan modification as well, so expect a lot of documentation to be asked for. Oh, and on a side note, I was trying to help a homeowner through this process last week, and we made a couple of calls. The lender we were speaking with said, “We are not currently entertaining loan modifications at this time.” When we dug into it a bit more, the reason given was they were waiting on the results of the election. Since McCain has promised to have the government buy up bad mortgages if elected, that lender is hedging it’s bets that they can unload the underperforming or underwater mortgage loans on the government. You may run into this as well.
FHA Loan Modification: Rererred to as Hope for Homeowners or H4H, this is a program where the current mortgage servicer (the bank) will agree to discount their mortgage to 90% of the current home value, then the homeowner is eligible to refinance into an FHA loan. I have written all the details in the previous post, The Great Bailout of ’08, I touched on some of the things that the government was planning on doing to abate the housing crisis. H4H is another one. It went into effect officially Oct. 1 this year; but most banks have yet to get their arms around this. So, if this is appealing, let’s talk and begin the process; but realistically plan to end the process with your refinance in place around January, 2009.

So, options exist, but they are not easy. But hard work for a good outcome never hurt anyone.