This new real estate ‘technical’ term underwater is getting quite a bit of press lately, and unfortunately it applies to a lot of us. What it means is “my house is no longer worth as much as I owe on it.” It means your equity is gone, and it also means that you can’t easily sell the house and pay off the loan if you want to move.
Truly an unpleasant situation.
Just for some rough numbers on the scale of the problem: there are about 110 million households in the U.S. Of that, about 70 million are in owned homes, not rentals. Of that 70 million homes, about 30% are owned outright – no mortgage. Of the roughly 50 million homes with a mortgage, about 25%, 12 million or so, are under water.
But you probably don’t care near as much about the other 11,999,999 mortgage holders as you do about yourself.
If you are one of those unfortunate underwater folks, this note will outline what some of your choices are, and what they might mean to you. Many of the choices are dependent on the question of whether you are financially solvent or insolvent. Insolvent means you do not have enough income or savings (excluding IRAs & 401Ks) to make the payments.
Here’s the topics, and the options. Each title is also a link to a more detailed write-up
- Sit Tight – If have the income or the reserves to make the payments, you may just want to sit tight and ride it out for however long it takes for prices to recover. For some, an unpleasant but practical option may be #5 below.
- Loan Modification – If you are insolvent, but have sufficient income to pay at least most of the mortgage, your lender may be willing to agree to a modification of your loan terms that allows you to make a lower monthly payment and still stay in your home.
- Short Sale – If you are insolvent and cannot make a substantial regular payment, your lender may agree to let you sell the house, and accept the proceeds (short pay) as full payment of the debt. There are some new government guidelines for lenders to help this along.
- Deed in Lieu – If you are insolvent as in the Short Sale case, your lender may also be willing to simply take the keys back, and accept the property in lieu of payment of the debt. This is more likely if a Short Sales has been attempted and was unsuccessful.
- Strategic Default – If you are not insolvent, but are so far underwater that you seriously want out of the house and the mortgage, and don’t care what happens to your credit score and your ability to borrow for several years, you may simply choose to walk away and let your lender foreclose.
- Foreclosure – If you cannot, or will not, make the mortgage payments, your lender, or current owner of your mortgage loan, can choose to foreclose (a minimum 6-month legal process), take possession and sell the property.
Please keep in mind that I am a real estate agent, not an attorney. I know about this stuff because I’ve dealt with it quite a bit, and I have a fair amount of training on it. But if you need specific legal advice, consult your attorney, and if you need specific tax advice or financial advice, consult your accountant or your financial advisor.