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

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Mark CappelJan 25, 2008
Key Takeaways:
  • Consider a short sale or deed in lieu of foreclosure.
  • Review the FHA Short Refinance program.
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?

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 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.