If you’re “upside-down” on your mortgage, meaning you owe more on your home than the home is worth, what are your options? This is an incredibly common situation in today’s rocky mortgage climate. The upside is that because this issue is so common, there are quite a few options on the table.
Here are some of the paths open to you if you’re upside down.
Loan Modification
A loan modification involves changing the terms of your loan to make it more realistic for you in your current financial situation.
Call your bank and ask for the loss mitigation department. You’ll have to provide documentation of your income and expenses to prove that you really can’t afford the payments as they are.
Rent It Out
If you want to continue making your payments to your current loan, you can try instead to just rent out your current home and then rent a smaller place instead.
This is a great option if you’re living beyond your means right now and want to preserve your credit rating. There’s also the chance that your home price will rise in the future.
Do a Short Sale
A short sale is when you ask the bank for permission to sell the home and repay the bank with whatever the home gets, rather than what you owe on the property.
The bank is taking a loss on the property on a short sale. However, since you’re going to fetch a similar amount to what the bank might expect if they foreclosed it and sold it themselves, they’ll often say yes to this proposal.
That said, the paperwork and negotiation of the details can take a long time.
Deed in Lieu
This is where you just give the bank the house and have the bank forgive your loan. It’s like a short sale to the bank.
Why would the bank agree to do this? Because if they foreclosed, they’d get the same result (ownership of the property), but only after a lot of legal expenses. A deed in lieu deal spares them that cost.
Two Inglorious Options
Finally, you have two other less glorious options.
First, you could just walk away. Don’t pay the mortgage. The bank will eventually foreclose on the house, but that takes several months. In the meantime, you have a free house to live in for a few months.
This will wreck your credit but if you can’t get any of the other options to work, it may be your only choice.
And the final option is to just keep paying the mortgage. You may be upside down, but if you can still afford the payments, you can choose to just keep paying it.
These are the most common options available to property owners today. If you’re upside down, these options can help you reduce the fallout.
