Underwater on Your Home? You Have Options

Javier Gonzales is legally a homeowner, but he says his first instinct is to say “no” if someone asks. This is because he hasn’t made the mortgage on the townhome he bought in years, and he doesn’t live there anymore. Gonzales says he owes $476,000 on the townhome, which is only worth around $263,000. “I don’t care about it. I don’t want it,” he says, and he’s not the only one in such a situation.

When the housing bubble popped in 2007-2008, millions of homeowners ended up with homes that are worth less than they owe on them. This can be a big problem when they’re ready to sell. If you owe more than a house is worth and want to sell, but aren’t sure what to do, here are six options.

1. Stay and Pay

There are several reasons you might choose to keep making the payment on a house, even if you owe more on it than it’s worth. You might have a strong attachment to your home and want to avoid foreclosure. Maybe you’re worried that your credit score will be damaged because of missed payments. Regardless of the reason, it may be best to stay and keep making the payment until the home’s value recovers.

While this is an option, it’s one that should be thought about carefully. It can take many years before you get back to right-side-up. Cathy Moran, a bankruptcy attorney in California, says, “I am spending a lot of energy talking people out of homes on which they are spending too much money and have no hope of having any equity in for at least a decade.”

If you decide to stay and pay, you may be able to get financial help to catch up with payments if you run into financial hardship. For example, the Emergency Homeowners Loan Program (EHLP) provides interest-free loans that may be forgiven over time to homeowners who have fallen behind on their mortgages. Because these programs change frequently, it’s a good idea to work with a HUD-approved housing counseling agency in your area to find out which programs may be available.

2. Refinance

If you want to move in the next few years but can’t afford to take the hit on selling your house immediately, refinancing can be a way to get out from under your mortgage faster. This is especially true if you’ve been in the house for a while and have made decent progress on the principle.

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Refinancing for a traditional 30-year loan with a better interest rate could lower your payments into manageable territory if you’re struggling. But if you have the cashflow, refinancing for a shorter-term loan can help you get what you owe in line with what the house is worth faster.

What happens if the mortgage is more than the home value? You can still refinance, but it may be more difficult to find a lender willing to take it on. If something happens and you default, the lender doesn’t have much hope of recouping their entire investment. However, programs such as HARP can help if you’re interested in refinancing.

3. Get a Loan Modification

A loan modification is another option that can help you stay afloat if the only reason you’re looking at selling is that your payments are too high. But even though your monthly payment may be lower, you’re probably going to be paying more money in the long term because the modifications are usually for a longer term.

This might be a good option if you’re not too far in the red on your house value and the local real estate market is back on the upswing. But it may make matters worse for someone who owes $100,000 more than the home is worth and wants to move in five years.

4. Go for a Short Sale

A short sale is a way to sell the house for less than it’s worth and possibly not have to worry about the difference. Short sales can be a good alternative for people who are facing foreclosure and can’t do a traditional sale. But they do have to be approved by the lender, which doesn’t always happen.

Before you go through with a short sale, it’s important to understand what impact it can have on your future finances. Here are some commonly asked questions about this option.

Can you sell your house if you owe more than it’s worth?Yes, you can, but depending on your state, you may still be responsible for the remaining portion of the loan. In a short sale, it may be possible to get the lender to sign a waiver of deficiency, which means you’re free and clear at the end of the sale.
Can you sell a house you haven’t paid off?Yes, a house doesn’t have to be sold to be put on the market. The majority of sellers still owe on their properties, but if you owe more than the home is worth, you could have difficulty getting enough money for it in a traditional sale.
What happens if you sell your house and still owe money?In most cases, you will still be responsible for the rest of the loan amount. However, if you were paying PMI or your lender agreed to a waiver of deficiency in a short sale, you may not have to pay that moneyback.

5. Walk Away/Foreclosure

If you’re not able to make selling work for you, the last option is to just walk away from the house and let the bank foreclose. While it may seem like this is a straightforward way to get out from under a big payment and a bad investment, many people don’t understand what a foreclosure means for them.

First, it will be a big hit to your credit. You can still take steps to rebuild, but you won’t be able to just go buy a cheaper, more affordable house. Some lenders require you to wait until the foreclosure is offered your credit report to be eligible for another loan, although FHA, VA and Department of Agriculture loans have shorter wait times. You could also still end up on the hook for the difference in the home’s value and the total you owe if the house doesn’t sell for the full balance and you don’t have PMI.

When you owe more than your house is worth and want to sell, it can be difficult to know what to do. It’s important to get advice from a qualified financial professional so you can better understand how each option may affect your particular situation.