Houses across the country are underwater. This means homeowners owe more on mortgage than what their house is worth.
This situation usually prevents owners from selling their house, unless they pay it directly out of their pocket. It can also prevent homeowners from refinancing.
In a worst case scenario, if the homeowner can no longer afford their mortgage payments, the home would fall into foreclosure unless the borrower is able to renegotiate the loan.
If you're underwater on your mortgage, there are some options to get out of it:
- Stay And Pay: If you can afford your payments, you may want to hang in there. But if you have little breathing room in your budget, or if your circumstances change, you may be at risk of defaulting in the future.
- Refinance: It may be possible to refinance an underwater home under the Home Affordable Refinance Program. The new first mortgage mustn't total more than 125% of the value of your home.
- Loan Modification: Lenders may be willing to modify your loan to reduce the interest rate, extend the term or even reduce principal. It can be a frustrating and difficult task to get a loan mod approved. Successful loan modifications usually involve a reduction in the principal loan balance, but those are few and far between.
- Short Sale: With a short sale, the lender agrees to let you sell your home for less than you owe. It's important to make sure you won't still owe a large balance (a "deficiency"). If you have a second mortgage, you'll also need to negotiate a settlement on that loan. Be sure to get a real estate agent and attorney to guide you through the process.
- Walk Away / Foreclosure: If you fail to save your home, or if you decide it's not worth it to stay in a deeply underwater home, you may go into foreclosure. In non-judicial states, foreclosures can happen quickly, while in judicial states, they can take months or years. In the meantime, homeowners may stay rent-free.
- Bankruptcy: Bankruptcy won't reduce the amount owed on a first mortgage for your principal residence, but it may be used to eliminate an underwater second mortgage, catch up on payments on delinquent loan, and/or force lender to modify the loan. Can also be used in conjunction with foreclosure or short sale to eliminate deficiencies and/or tax liability.
Credit.com has more on underwater mortgages right here.