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what do when you are Underwater with your Mortgage
“Underwater” mortgages occur when a homeowner’s mortgage note balance is greater than the actual value of the home. Because the value of real property exceeded true market values as a result of loan saturation and real estate investment speculation, homeowner’s that took out first and second mortgages now find the value of the property to be less than the amount owing.
Mortgagees caught in this particular predicament may face rising mortgage payments due to ARM loans (Adjustable Rate Mortgages) and/or artificially high property taxes.
Ride out the real estate downturn:
Though underwater mortgagees may owe more than the property is worth that does not necessarily mean the borrower cannot afford the monthly mortgage payment. Mortgagees who are in this particular situation might attempt to ride the real estate downturn into recovery. Real property values have historically rebounded and if given enough time, borrowers may see a break-even point or an eventual appreciation greater than the mortgage balance.
Seek a loan modification:
Should an underwater borrower be unable to make mortgage payments in the near future, approaching the lender for options sooner rather than later is paramount. Lenders may offer short or long term forbearance agreements or a partial reinstatement. In any case of loan modification the borrower should know the fix is temporary and failure to meet any provision can negate the modification. Borrowers with FHA loans should consult HUD guidelines for federal loan modification plans and/or programs.
Rent the property out:
Another choice for underwater mortgage borrowers is to rent out the property and if necessary, cover the difference between the monthly rent and the mortgage payment. Homeowners should collect first and last month’s rent, along with a refundable security deposit.
Negotiate a short sale:
Borrowers that cannot wait out the real estate market or do not have the means to meet a forbearance plan and cannot meet or do not meet HUD guidelines, might elect to negotiate a short sale with the lender. In a short sale, the lender agrees to take a loss on the mortgage but may seek legal restitution even after the short sale has been approved and the property has sold.
File for bankruptcy:
Filing under Chapter 13 bankruptcy protection will allow the borrower to stay in the home but does not absolve the mortgage. Missed payments must be made up over the course of 60 months in addition to the regular mortgage payment.
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