If you’re underwater on your mortgage, what you need is a life raft – you need some way to get your head above water. Fortunately, banks don’t make this nearly as impossible as you might think.
Stay And Pay Your Mortgage
Just because you’re underwater on your mortgage doesn’t mean that you’re in financial trouble. Sure, you might not like the idea that you’re “losing money” on your home. However, remember that the real estate market can always turn around in the future. That lost appreciation may one day be found. If you can still afford to make payments on the home, try to do so. This will be the least-damaging option you have.
Refinance The Home
Most people don’t know that refinancing is an option, but how does that work when you have no equity in the house? Believe it or not, you can refinance underwater mortgage in NJ as long as you do so under the Home Affordable Refinance Program through Freddie Mac or Fannie Mae.
Your credit score won’t be affected, but you could still lose your home if your financial situation changes again and you can’t afford your mortgage payments. You will pay the usual refinancing fees and have to fill out an application.
Get A Loan Modification
When a lender agrees to a loan modification, they are acknowledging that you can no longer afford your mortgage payments. If your mortgage payment is more than 31 percent of your monthly pretax income, and you’ve suffered a financial hardship, your lender might approve you for a modification.
However, depending on how the lender reports the modification, your credit might be negatively affected, so ask before you agree to this option.
Short Sell The House
Short selling the house is usually done when there are no other options available to the homeowner. It involves selling the home for less than the mortgage amount. In most cases, you’ll need the help of a lawyer and a real estate agent to pull this off.
However, short sales don’t always mean that you must take a hit on your credit report. Sometimes, lenders will give you a cash incentive to stay in the home and help sell it (called a “cooperative short sale”) and then offer you a promissory note – an additional separate loan after the home is sold that allows you to pay off the remaining balance on your mortgage.
On the other hand, sometimes lenders take a loss on the house, write off the debt as bad debt, and then issue you a 1099 which you must then claim as income and pay tax on.
Deed In Lieu Of Foreclosure
Another option is to give the deed back to the bank. This is usually an unattractive option from a credit standpoint, because it’s going to cause a full default on your mortgage loan. However, it saves you (and the bank) both time and money by not having to go through the foreclosure proceedings.
You can always walk away from the home. This isn’t the most responsible option out there, but it’s one many people have taken. The bank will commence with foreclosure proceedings and you’ll receive a derogatory remark on your credit report.
File For Bankruptcy
Filing for bankruptcy doesn’t automatically absolve you of your debts, but it can make things easier on you. When you file for bankruptcy, the court may force you to repay your lender, but at a different interest rate or a lower monthly payment. This would be an example of Chapter 13 bankruptcy. Your other option is to try for Chapter 7, in which all of your debts are effectively “erased.”
Find Someone To Assume Your Mortgage
If you can find someone to assume your mortgage, you won’t lose anything. The loan will look as though it’s paid off on your end and the new person gets to pick up where you left off.
Lisa Anders loves to help people with troubled mortgages hold on to their homes. When she has time, she also likes to research and write about real estate. You can find her informative articles on many mortgage, investing and real estate websites.