How to Walk Away from a Negative Equity Mortgage
Have found yourself in an upside-down mortgage, where you now owe more than the house is worth? If so, you are not alone in this economy. The US housing market has been recovering since the industry bubble burst in 2007. But as recently as 2015 more than 4 million U.S. homeowners still owed the bank at least 20% more than their homes are worth.
A negative-equity home can add mountains of stress to your already long list of responsibilities. Banks and regulators have provided options for home owners to get out from under their mortgage. If none of those seem to be the right fit for your situation private companies have provided additional options for recovery.
Foreclosure is when a lender takes possession of a property after the mortgagor fails to keep up their mortgage payments. This can be the scariest option for someone trying to get out from under their upside-down mortgage because foreclosures appear on your credit report for up to seven years.
Short-Term Alternatives to Foreclosure
A loan modification is a permanent restructuring of the mortgage where the terms of a borrower’s loan are changed to provide a more affordable payment. To be eligible for a loan modification, you must show that you cannot make your current mortgage payment due to a financial hardship, complete a trial period to demonstrate you can afford the new monthly amount and provide financial documentation to the lender for evaluation.
Forbearance is beneficial for those that have fallen on temporary hardships, and plan to be able to pay their full mortgage payments in the near future. The lender agrees to reduce or suspend mortgage payments for a certain period of time. In exchange, the borrower must resume the full payment at the end of the forbearance period, plus pay an additional amount to get current on the missed payments.
Repayment plans occur if you have already missed some of your loan payments due to temporary distress. If your lender agrees to set up a repayment plan your overdue amount will be spread over a certain number of months and added to the monthly amount you already owe. Once you are current your monthly payments will go back to the original amount you were paying.
Long-Term Alternatives to Foreclosure
When a homeowner owes more than the house is worth some individuals choose to voluntarily let their property go into foreclosure even when they are able to make payments. This uncommon action is referred to as strategic default.
This option will still cause a foreclosure to appear on your credit report for seven years. In certain states your lender could choose to sue you to collect the balance of the loan after the foreclosure is completed. If the lender sues and obtains a deficiency judgment against you, the debt can haunt you for years.
Because it will be extremely difficult to get a home loan in the near future those who choose to do a strategic default should put away large sums of cash before they go into foreclosure. This is a highly risky option and should take place only once you have set yourself up to avoid disaster post-foreclosure.
Deed-in-lieu of foreclosure
If you are faced with long-term hardships a deed-in-lieu of foreclosure may be an option of interest. Deed-in-lieu of foreclosure is when the mortgagor voluntarily transfers home ownership to the owner of the mortgage in exchange for a release from your mortgage loan and payments.
A short sale is when the mortgagor sells the home to a third party for less than the total debt remaining on the mortgage. In exchange for this the lender agrees to accept the proceeds from the sale in exchange for releasing the lien on the property.
Negative-value mortgages can disrupt your life in unexpected ways. Finding a way out from under your upside-down mortgage is possible. If you have concluded that a long-term option is necessary for your situation selling to a homebuyer may be in your best interest. Real estate investors like Home Vestors pay cash pay cash for your property regardless of the condition.