Now that you have your dream home, what do you do when you find that you owe more on your mortgage than the home is worth? While it may not make you feel better, know that you are not alone. It unfortunately has become all too common. So, what should you do?
First of all, don’t panic. There are options. They aren’t convenient, and they will hurt but you CAN get out from under it with some gut wrenching decisions and much perseverance.
If Possible – Hang on to it!!!
Take a look at your overall financial picture. If you don’t have to sell your home, DON’T. Hang on to it and wait out the economy. The “guru’s” all seem to think 3-5 years for recovery and depending on how upside down you are, you may be able to ride out the storm. Tighten your budget so that the ride doesn’t bankrupt you. And if you can afford to, just one extra payment per year can take years off your overall loan. If you have an adjustable rate mortgage, making extra principal payments can reduce your mortgage payment too.
Modify the Loan
Talk to your current lender about a Loan Modification. This is the hard part. They aren’t easy to get, they are a lot of work, and take some time to complete, so be ready for it. But they do get approved and can significantly improve your budget. But don’t get lulled into easy street. Even though you can get the payment reduced temporarily, continue to put away as much money as you can so you are ready when the modification ends. And even if you do get a long term modification, continue to budget for the long term so you can get back on your feet even if the economy doesn’t. DO NOT, under any circumstances, pay someone to do a modification for you. These are scams out to steal your money. They don’t work no matter how great they sound. Remember when your Mom said, “if it sounds too good to be true, it probably is”? Live by that. She was right!
If you have to sell, this is where a “short sale” comes into play. You’ve heard people talk about it. It’s when you sell your home for less than what you owe on the mortgage. It can have serious tax and credit ramifications so be sure to talk to your accountant before engaging in one. The “forgiven debt” (the amount the lender forgives on the loan balance) in some cases can be taxable income, or you may be exempt depending on your situation. Your accountant can guide you on that. Now for the credit problems; a short sale will have a serious negative effect on your credit for at least 2 years under current lending guidelines. Yes, it’s easier on your credit than a foreclosure, but it still hurts. A lot. So just know that you may end up paying higher interest rates on car loans, credit cards (you shouldn’t be carrying a balance anyway), and you’ll probably have to rent for a while, while you rebuild your credit. But it gives you that clean slate to start over. If you decide to choose this route, be sure you hire a real estate agent who has extensive experience doing short sales or you may end up in foreclosure anyway. It’s a difficult and time consuming process so you need someone on your side who knows what they are doing.
Your absolute last resort is foreclosure. This will ruin your credit for a least 7 years and will have wide spread consequences for future purchases for just about everything you need to finance. You will likely also end up paying higher rents and higher deposits to compensate the landlord for taking on what is considered a “high risk” tenant. Some people have a lot of difficulty with the stigma attached to foreclosure. I’ve seen many marriages fall apart over this so this would be a good time to consult a counselor or your clergyman for guidance on coping with the disappointment and hardship.
The goal here is to get back on your feet as quickly as you can so it doesn’t snowball into something larger than life. Be proactive. Know your options. And know when to cut bait when all else fails. And be sure to have your support system in place while you go through this so you stay strong, united, and confident to put things back together.