Mortgage underwater…now what?
When your mortgage is underwater, the amount you owe on the mortgage loan is more than the property’s current market value. So, of course, it’s best to ride out the changing real estate market and stay in the home for several years to allow equity to build. However, many motivating factors lead homeowners to sell, such as moving long distances to be nearer to family, a sudden job relocation, or difficulty making payments. In addition to the typical stresses of life, selling your home can be extremely stressful, expensive, and time-consuming. It may also be the largest financial transaction of your life, and naturally, you want to make the best deal possible, despite your circumstances.
Understandably, sellers feel overwhelmed when faced with a mortgage underwater; however, when you understand your choices, you can move forward and confidently make decisions. A few options are available if you’re facing difficulty making payments.
Being “underwater” or having negative equity can be a challenging situation, but there are several options you can consider:
Keep making your mortgage payments
While it can be tempting to stop making mortgage payments when your house is underwater (meaning you owe more on your mortgage than the current market value of your home), it is generally advisable to continue making your payments. Here are a few key reasons why:
- Protecting your credit score: Making timely mortgage payments is essential for maintaining a good credit score. A history of missed or late payments can have a significant negative impact on your creditworthiness, making it more difficult to obtain loans or secure favorable interest rates in the future. By staying current on your mortgage, you demonstrate financial responsibility and preserve your creditworthiness.
- Avoiding foreclosure: If you stop making mortgage payments, you increase the risk of foreclosure. Foreclosure is a legal process through which the lender takes possession of your home due to non-payment. Foreclosure has serious consequences, including the loss of your home and long-lasting damage to your credit score. By continuing to make mortgage payments, you reduce the likelihood of foreclosure and maintain control over your housing situation.
- Potential for future equity: While your home may currently be underwater, the real estate market is subject to fluctuations. By staying committed to your mortgage payments, you have the opportunity to build equity over time as property values potentially increase. This can position you in a better financial situation in the future, enabling you to sell your home without incurring a loss or even potentially regain positive equity.
- Negotiating with the lender: If you are facing financial hardship and are struggling to make your mortgage payments, it may be worthwhile to reach out to your lender and explore potential options. Lenders are sometimes willing to work with homeowners facing financial difficulties, offering solutions such as loan modifications, refinancing, or repayment plans. By maintaining regular communication and demonstrating your commitment to resolving the situation, you may be able to negotiate more favorable terms that alleviate the burden of an underwater mortgage.
While the decision to continue making mortgage payments on an underwater house is ultimately yours to make, it is generally recommended to fulfill your financial obligations. By doing so, you protect your credit score, avoid foreclosure, maintain the potential for future equity, and increase your chances of finding a viable solution with your lender.
Refinance your mortgage
Refinancing a mortgage when you are underwater (meaning you owe more on your mortgage than the current value of your home) can be more challenging but not impossible. Here are some steps to consider:
- Assess your eligibility: Understand that refinancing an underwater mortgage can be difficult because lenders typically require a loan-to-value (LTV) ratio within a certain range. However, some government-backed programs may offer options for underwater refinancing. Research programs such as the Home Affordable Refinance Program (HARP) or the Federal Housing Administration (FHA) Streamline Refinance program to determine if you meet the eligibility criteria.
- Improve your financial profile: Enhance your financial standing to increase your chances of refinancing. This can include improving your credit score, reducing other debts, and maintaining a stable income. Lenders are more likely to consider borrowers with good credit and a lower debt-to-income ratio.
- Contact your current lender: Reach out to your current mortgage lender to discuss refinancing options. While they may be hesitant to refinance an underwater mortgage, it’s worth exploring the possibility. Explain your situation and inquire about any special programs or options they may offer for borrowers in your circumstances.
- Research alternative lenders: Explore different lenders who specialize in refinancing underwater mortgages. Some lenders may have specific programs or loan options available for borrowers in your situation. Look for lenders who are experienced in dealing with underwater refinancing and contact them to discuss your options.
- Consider loan modification: If traditional refinancing is not feasible, explore the possibility of a loan modification with your current lender. Loan modification involves negotiating changes to the terms of your existing mortgage to make it more affordable. This can include reducing the interest rate, extending the loan term, or even forgiving a portion of the principal.
- Seek professional guidance: Consult with a mortgage professional or housing counselor who specializes in underwater refinancing. They can provide guidance on available programs, assist with the application process, and help you navigate through the complexities of refinancing an underwater mortgage.
- Document your financial hardship: If you are experiencing financial hardship that is preventing you from making mortgage payments, gather and document evidence of your situation. This can include pay stubs, tax returns, bank statements, and any other supporting documents. Demonstrating your financial hardship may help in negotiating with lenders or qualifying for specific refinancing programs.
Professional buyers, like those at Dragonfly Investment and Development, can help you understand your options and weigh the pros and cons of each course of action. At Dragonfly Investment and Development, our professional buyers work with a policy of total transparency because we want what is best for the seller; we’re proud of our work helping Denver sellers deal with problems selling their houses.
There are various government programs and non-profit organizations that may be able to assist you if you are struggling to make your mortgage payments. These include the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).
It’s essential to consult with a financial advisor or housing counselor to understand your options and make an informed decision based on your circumstances.
Remember, refinancing an underwater mortgage can be more challenging, and not all borrowers may qualify. It’s crucial to be proactive, explore your options, and seek professional guidance to determine the best course of action based on your specific circumstances.