The threat of an underwater mortgage has been mitigated by nearly a decade of recovery. A great deal of homeowners across the country can now sleep well, knowing that their real estate assets have become the beneficiaries of approximately ten years of appreciation. Most homes, for that matter, have all but recovered from the last recession, but I digress. There are still those out there facing uncertainty, or even an underwater mortgage of their own. To them, I echo an important sentiment: don’t worry, there’s hope. While an underwater mortgage is certainly something everyone would hope to avoid, there are steps to ease the situation, not the least of which will be outlined below.
An underwater mortgage identifies homeowners that owe more than the home is actually worth; the cumulative debt has actually exceeded the home’s free-market value. More importantly, however, an underwater mortgage is void of equity, and therefore a threat to the homeowner’s financial well-being. There’s no doubt about it: an underwater mortgage can be devastating. Fortunately, those that are upside down on their own assets aren’t without options. Depending on their particular scenario, there are several steps that can be taken.
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An underwater mortgage is no laughing matter, and still represents the primary mechanism responsible for the most recent housing market decline. The absence of equity from one’s primary residence is nothing short of devastating, but I can assure you it doesn’t spell the end for homeowners. If for nothing else, there are several opportunities made available to underwater mortgage holders, not the least of which include the following:
It should be made abundantly clear: refinancing an underwater mortgage is possible under the right circumstances, but nobody should fool themselves into thinking it will be a simple task. More specifically, there is a single option made available to those looking to refinance underwater mortgages: the Home Affordability Refinance Program (HARP). More accurately, HARP isn’t only the best underwater mortgage refinance option made available to those with negative equity, it’s the only one. That said, homeowners upside down on their mortgage must qualify for HARP if they hope to refinance their current loan.
Relatively new to the housing industry, HARP was introduced in March 2009. The federal program was specifically designed to help borrowers with little or no equity in their homes to refinance to a more manageable payment plan. To qualify for HARP, however, borrowers need to exhibit a loan-to-value ratio equal to or greater than 80 percent. Additionally, those same borrowers need to have demonstrated an increased propensity for timely payments over the last 12 months.
In the event underwater homeowners do, in fact, qualify for HARP, they may be rewarded with significant savings by:
Short sales should only be reserved for those underwater homeowners that absolutely need to sell their properties. Even then, however, homeowners without any equity will still need to persuade their lenders to approve a short sale. That said, if you absolutely must sell, and your lender gives you the “green light,” a short sale may represent a unique opportunity for negative equity homeowners to remove themselves from the poor position they are currently in.
Once granted approval from a lender, a short sell is simply the process of pricing a home to sell aggressively. Given the appropriate approval, a short sale will allow homeowners to sell their homes for less than they currently owe on the mortgage. The idea of a short sale, at least on the lender’s behalf, is to offer an alternative to foreclosure. You see, lenders would rather take the loss on a short sale than risk the homeowner falling into foreclosure. Lenders are not overly fond of the idea of short sales, as they ultimately lose money on a given deal, but it’s better than the alternative. Short sales are not easy to come by, nor are they without consequences for sellers; namely, a significant hit to their credit score.
Better than both a short sale and refinancing through a HARP, the best thing an underwater homeowner can do is to stay put. While the situation may look bleak in the moment, underwater mortgages are just as susceptible to market fluctuations as home values. That means it’s entirely possible for the home to appreciate enough to build equity that was once thought gone for good. More importantly, the housing market has historically appreciated. While current conditions may suggest your home is void of equity, it’s entirely possible for a drastic shift to take place. And while equity is never guaranteed, history has taught us that it is more likely to happen than not.
The single greatest step an underwater mortgage holder can take is to educate themselves on each and every option made available to them. There are several opportunities to pursue, each of which serves a unique purpose, but I digress. The idea isn’t necessarily to use the right strategy, but rather the right strategy for your personal situation. If for nothing else, each of the approaches I hit on above are viable options, but they should each be used accordingly. That said, if you had to choose one, the lesser of the “evils” is almost certainly staying in the home. In the event homeowners are able to continue making payments, staying put awards them with an opportunity that no other option offers: the chance to appreciate.
Nobody expects to find themselves with an underwater mortgage. It is a sad truth, but a reality, nonetheless: underwater mortgages aren’t going away anytime soon. Anytime there is the potential to experience market fluctuation, homes may depreciate to a point they are worth less than the owner owes. Even then, however, not all hope is lost. There are methods to ease the pain of an underwater mortgage.