What can you do if you owe more on your mortgage loan than what your house is worth? You have several options, though not all of them are particularly pleasant.
Stay Where You Are
The best choice is to stay put. You can’t lose money if you don’t sell your home. This is a good choice if you like your home and your neighborhood.
Unfortunately, life has a way of changing this plan. Maybe you or your spouse needs to move because of a job relocation. Maybe you’re going through a divorce and you have to sell your home. In such cases, you might be stuck with a loss if your home’s value hasn’t rebounded by the time you need to move.
Re-financing won’t help you sell if for enough money to bring in a profit. But refinancing can bring some relief in the form of a lower interest rate and a lower monthly payment, something that might help erase the sting of being underwater.
Unfortunately, most mortgage lenders require that you have a certain percentage in equity in your home before they’ll approve you for a refinance. The federal government, though, does offer its Home Affordable Refinance Program. Under this program, lenders are given financial incentives to refinance the home loans of owners who owe more on their loans than what their homes are worth.
If you have to sell your home, you might be able to convince your lender to approve a short sale. A short sale is when your lender agrees to let you sell your home for less than what you owe. In this type of sale, you can price your home more aggressively to move it quicker, and your lender will pay the difference between what you sell it for and what its worth.
This can still be difficult, because your lender must approve any offer you receive, even if you think the offer is good. If your lender rejects an offer, your sale will fall through. Some lenders won’t even consider a short sale. A short sale will also damage your credit score.
Some homeowners, convinced that their homes’ values will never recover, simply walk away from their homes. They stop making their monthly mortgage payments even if they can afford them. This is known as strategic default. Some argue that this is unethical. Others say that owners shouldn’t be expected to keep making payments on what has become a bad investment. Know, though, that walking away from your mortgage will send your credit score plummeting. And when you eventually fall into foreclosure — the end result of a strategic default — this negative judgment will remain on your credit report for seven years.