Options for Underwater Mortgages

November 24, 2011

When the economy collapsed in November 2008, many homeowners suddenly found themselves with underwater mortgages, owing more on the mortgage note than the house that secured the note was worth. As the economy continued to falter, many found it difficult to keep up with their exorbitant mortgage payments.

The residential real estate market shows few signs of significant recovery any time soon. According to RealtyTrac, a firm that records home foreclosure data, lenders foreclosed on over one million homes in 2010 alone - a record number. In Alabama, foreclosure sale listings show that lenders foreclosed on 19,896 homes in 2010. RealtyTrac data for 2011 suggests another record-breaking year for foreclosures. In the face of such a grim situation, many homeowners are wondering what their options are for their underwater mortgages. Homeowners with underwater mortgages may want to consider loan modification, short sales, voluntary foreclosure or bankruptcy.

Loan Modification

One possibility for those with underwater mortgages is to speak with the lender about a loan modification. Unfortunately, those who need modifications the most, such as the unemployed or those who are behind in house payments, often do not qualify for them.

Additionally, lenders often tack on fees for loan modifications. According to The Wall Street Journal's SmartMoney analysts, almost 45 percent of loan modifications result in higher monthly payments for borrowers due to lenders' fees.

Industry experts also warn homeowners to be on the lookout for loan modification scams. Many desperate homeowners have given money to companies promising to negotiate loan modifications only to have the company run off with the money. The best way to pursue a modification is to speak to the lender directly or to hire an attorney for assistance.

Foreclosure

In certain instances, it may make most sense for the homeowner to walk away from the home and let the lender foreclose. Foreclosure negatively impacts a credit score for up to seven years. Some may not consider that an issue, since they do not intend on trying to purchase another home within that time. However, a credit score also affects a person's ability to rent an apartment and obtain some jobs.

When a person simply lacks the money to keep fighting foreclosure, though, a voluntary foreclosure may be the least costly option.

Short Sales

A short sale occurs when the owner of a house sells the home for less than the amount that the owner still owes to the lender. This option is difficult, as it involves listing the property with a real estate agent, finding a willing buyer, submitting the offer and a "hardship package" to the lender and then getting the lender to agree to the sale. Some lenders may be willing to agree to the short sale rather than having to go through the work of foreclosing on the property, but it is often difficult to get lender approval for short sales. Not all homeowners qualify for short sales, either.

A seller considering a short sale needs to examine the sale documents carefully to ensure that the lender is releasing the homeowner from liability for the deficiency between the loan amount and the sale price of the home. Some lenders have been agreeing to short sales and drawing paperwork that makes the homeowner liable for the difference in the sale price and the loan debt, meaning that the homeowner now has no home but still has debt.

Another aspect of a short sale that a homeowner needs to consider is that he or she may have to pay federal income taxes on the difference between the amount that he or she owes on the house and the amount the new buyer pays for the house.

A short sale also damages a person's credit rating, but not nearly as long as a foreclosure does. A short sale stays on a credit report for roughly 24 months.

Bankruptcy

Experts suggest filing bankruptcy as a last resort for those struggling with underwater mortgages. While filing a bankruptcy petition does stay any foreclosure action on the part of the lender, bankruptcy is more suited to helping those struggling with unsecured debt such as credit card or medical bills.

Filing bankruptcy affects a person's credit rating for seven to 10 years, depending on the type of bankruptcy a person files.

What Not to Do

Experts recommend that those struggling with underwater mortgages avoid certain tactics:
- Short sales to friends: homeowners who sell their houses to friends thinking that they can re-purchase the home from the friend at a later date for less money are committing fraud and could face criminal charges
- Do not tap retirement savings to try to save a house because retirement accounts are often protected from liens and this money may be all that the homeowner has left after losing a house

The prospect of losing a house can be extremely stressful. If you have an underwater mortgage and are struggling to make payments, contact an attorney who can discuss all of your options with you and help you decide the right course of action.

Article provided by Gina H. McDonald & Associates, L.L.C.
Visit us at www.ginamcdonaldlaw.com