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Advice on actions to take if you are upside down on your mortgag

What if you owe $550k on your house but due to home prices dropping, the house is now worth $400k? What can I do?

What if you owe $550k on your house split between a first $440k and a second $110k, but due to home pricing dropping, my house is now worth $400k. What can I do?

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Bill's Answer
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Updated: Sep 23, 2014

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Highlights

  • Consider a short sale or deed in lieu of foreclosure.
  • Review the FHA Short Refinance program.

You are not alone in this situation, may people are finding themselves in an "upside down" situation. First of all, if you can afford your payments, then stay on course. Hopefully, the market should turn around and you should be in a better position to maybe start thinking of a refinance. If you are thinking about a refinance, I do not think that it will be a viable proposition given the fact that the new loan would have to finance 137% of your value. While loans of up to 125% LTV are possible, they are very rare and will turn out prohibitive, cost wise.

If you have having difficulty keeping up with the payments, you may want to consider a short-sale, in which your mortgage company would accept less than the full balance of the mortgage to settle the debt. You would then sell the home and pay the mortgage company whatever you received, and the mortgage company would forgive the remaining balance. If you are interested in a short sale, the first step is to contact your mortgage lender to find out if this is an option. You can only proceed with a short sale with the consent of the mortgage holder, so it is imperative that you communicate with the lender.

For more information about short sales and deeds in lieu of foreclosure, see the Bills.com resource Deed In Lieu Of Foreclosure vs. Short Sale. Generally speaking, a short sale is a much less painful process than allowing the property to fall into foreclosure, especially from a credit-score perspective.

If your lender will not allow you to conduct a short sale, you may also want to consider asking the lender about a "deed in lieu of foreclosure" agreement, which involves surrendering the home to the lender to prevent foreclosure. I strongly encourage you to speak with a qualified attorney before making any decisions regarding your home, as your state's laws could significantly affect how you decide to resolve this problem.

I hope that the information I have provided helps you Find. Learn. Save.

Best,

Bill

Bills.com

45 Comments

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  • JB
    Feb, 2012
    Jackie
    My husband and I purchased a new home four years ago for 389,000 in a brand new development. Up until about a year ago, building had come to a screeching halt but this past year...houses have been going up a little at a time. My husband just found out that our exact same floor plan, with many upgrades that we don't have - has just sold for $300,000. After calculating the difference in upgrades we are $100,000 upside down in our mortgage. My husband will be retiring in 7 years and when he does we would like to move someplace warm and less expensive. I know lots of other people are having the same issue..although we love our home it feels like a big albatross around our neck. Is there anything we can do that won't impact our credit?
    0 Votes

    • BA
      Feb, 2012
      Bill
      The only way you can sell your home without a negative impact on your credit score is to sell it and pay any deficiency balance. All other tactics — foreclosure, short sale, deed-in-lieu-of-foreclosure — result in a negative impact on the borrower's credit score.
      0 Votes

  • SL
    Nov, 2011
    Steve
    I am a totally disabled vet. My home is now worth $49,900. I owe $187,000. What can I do? my only income is disabilty from the va.
    0 Votes

    • BA
      Nov, 2011
      Bill
      The answer to your question depends on your goals and circumstances. Do you want to refinance? Can you afford your present payment? Do you wish to sell the property and reside elsewhere?

      See the Bills.com resource Refinance VA Loan if refinancing is your goal.
      0 Votes

    • SL
      Nov, 2011
      Steve
      I would like to lower my payment as much as possible since I am on a fixed income
      0 Votes

    • BA
      Nov, 2011
      Bill
      To the best of my knowledge, the VA does not offer a modification plan for its loans. For more information, see the VA's Veteran Borrowers in Delinquency Quick Reference Sheet, a PDF document.
      1 Votes

  • RL
    Oct, 2011
    Rafael
    My home is also down in value. I bought my house for 269,000. I currently owe 235,000 and my house is value around 219,000. I am trying to see if I qualify for refinance. I currently have a 5.875% on my loan which was funded by Fannie Mae and I have never been late, but I was told I don't qualify because I pay PMI? What can I do? Is that true?
    0 Votes

    • BA
      Oct, 2011
      Bill
      Although you are underwater at a LTV ratio of 107%, there is still a possibility to refinance under the HARP program. Paying PMI does not disqualify one from the program. Beyond the qualifications you mentioned (LTV, Fannie Mae Loan, and being current on your loan), you must also be sure:
      • You are the owner-occupant of a one- to four-unit home.
      • You have a reasonable ability to pay the new mortgage payments.
      • The refinance improves the long term affordability or stability of your loan.

      Although you may feel that you should qualify for a refinance loan, no lender is obligated to refinance under the program and many lenders simply chose to not participate. New HARP details will be released at mid-November and it is expected that many more lenders will participate in the new program than did in the old.

      Check back with Bills.com for updated information regarding the updated HARP rules.

      0 Votes

  • JL
    Oct, 2011
    jeremy
    Right now my house is worth about a 170,000. I owe about 227,000 dollars on so im not able to refinance because its about 135 percent of loan to value. What i dont understand is a. keeping the interest rates down is only helping the rich or those that have owned there homes along time. b. why cant my own bank or anywhere take my loan, its stupid u cant refinance , should i just quit paying to get the mortgage companies attention or what. c. why is there absolutely no where i can get a loan from anywhere or anyone to enjoy the nice rates others are. Im paying 6.75 please help me thanks
    0 Votes

    • BA
      Oct, 2011
      Bill
      Unless and until Congress and the Administration can agree to deal with the ocean of underwater mortgages in the US today, I do not see much help for homeowners or the housing market.
      0 Votes

  • KT
    Jul, 2011
    Krysti
    I have a different question. I am upside down, but I have the money to pay extra every month. Should I do that and if so, how much extra?
    0 Votes

    • BA
      Aug, 2011
      Bill
      I can't properly answer your question without knowing more about your income, property value, other debts, retirement accounts, etc.
      0 Votes

    • NC
      Sep, 2011
      Nobody
      I think making extra principal payments is always a good thing. The quicker you can get your upside down mortgage under the 125% LTV mark, the sooner you can refi.
      0 Votes