Have you heard of the term “upside down mortgage?” What should you do if you are facing an upside down mortgage on your house right now?
An upside down mortgage is another term for negative equity wherein the value of your house is less than the amount of the loan used as a mortgage.
This usually happens when the market value of the mortgaged property falls in value. It can also happen when the owner gets a second loan to mortgage the house, and the combined loan amount exceeds the value of the house. This commonly happens once the value of the house drops after its purchase. Aside from mortgage loans, it also happens to car loans where the purchase value of the car drops down to 20% as soon as the automobile is steered off the lot.
Consequence of an Upside Down Mortgage
An upside down mortgage can have risky effects when the house owner needs to sell the property, but cannot bring enough money to cover the equity balance. Sometimes the owner can ask for a short sale with the lender but if the short sale is not successful, the property may lead to foreclosure. Aside from the foreclosure , it may give you problems with the IRS and credit report damage.
What to do when you’re in an Upside Down Mortgage
1. Make your selling price lower and sell the property for the best amount that you can get. The amount after your selling costs should at least help in bringing increased cash to pay your settlement. This would at least get you out of the present mortgage situation in your house, and would enable you to buy a new property. You just have to come up with a different way to add funds to get a new property.
2. Buy a new house and find a way to have the old house rented. Whether this is possible or not , this is another solution to consider if you want to get out of your upside down mortgage. The amount that you can get from renting the property will help to pay the current mortgage and get a new house as soon as possible.
3. Stay in the current house and manage it the best way you can. This may not be an enticing option, but it could be the best and most financially sensible option. You may not be able to pay the upside down mortgage but in today’s restrictive lending procedures, it may be difficult to get a loan to buy a new property.
Staying in the same house can be an advantage as well, because there is a possibility that the mortgage situation may change in the future. This will give you a chance to save money, pay the mortgage and the market value of your house may improve that would enable you sell it for a higher price later on. It’s not recommended to just abandon the house that is under negative equity, because it will give you a negative credit rating. It would make it very difficult to get a loan in the future with a terrible credit rating next to your name.
4. Check if you can apply for The Home Affordable Modification Program (HAMP). HAMP extends help to eligible homeowners by giving them a chance to adjust their loan. To be eligible, you must be paying more than 30% of your total income in mortgage payments for your primary home. Also the amount you owe must be less than $730,000 in loans — this figure is as of September 2010.
There is a three month trial period at the start of the program to make sure that you would be able to make the new debt payments. Once the trial period is over, the lender will change the mortgage permanently.
5. See if you can qualify for a Short Refinancing loan from the Federal Housing Administration or FHA. With this program, the lender cancels 10% or more of the house’s principal debt balance. The qualifications are the following:
* Your debt is not owned or assured by FHA, VA, or USDA
* Your debt is worth more than your home’s value
* You are current on your mortgage premium
* You are living in the primary home that is being mortgaged.
An upside down mortgage is really tough for a homeowner who cannot make timely payments or has an urgent need to relocate. However, it is not an impossible situation to get out of. With determination and right decisions, you should be able to get out of this problem.