My Home Is Over-Leveraged!
What Are My Options?
Today over 25% of the homes in America have loan balances that exceed the home value. If you are one of them it’s not your fault and you do have choices which are laid out here.
You didn’t create the deepest recession in our lifetime and cause residential real estate values to drop 30%-60% across the country. You bought a home, the American dream. You worked hard to pay the mortgage and maintain the home and woke up one day underwater. And it all seemed to happen so fast.
Millions of good people are walking away from their mortgage and letting the bank foreclose which adds to the millions of bank owned houses and continues to lower values when they are sold off at distressed prices.
This is certainly one of your options but not the only one and may be your least favorite choice. However, until all your choices are on the table it’s hard to decide which is the best one, so here they are.
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Remain in the Home: Continue paying until the value increases and gives you enough equity to sell without being forced to write a big check to pay the difference.
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Pros: Your credit will remain intact and as the years go by your debt is decreased.
Cons: Many people simply can’t remain in the home for various reasons and must have another solution. Most sources say it will be at least a decade before the values of 2005 return and maybe much longer.
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Rent the Home: Some people are becoming forced landlords and this is an option if you’re prepared to deal with a tenant and your payments can be covered with rent.
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Pros: Your credit will remain intact.
Cons: You must find and screen a tenant and then deal with tenant issues and repairs.
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Deed in Lieu: You may ask the bank to take back the house to avoid foreclosure. If they do you cannot be pursued for a deficiency judgment. Make sure you get an attorney involved in this choice and let him/her approach the bank.
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Pros: You are relieved of the home and the debt without foreclosure.
Cons: Your credit score will be reduced and many banks will not accept a deed in lieu of foreclosure.
4: Mortgage Modification: Millions of homeowners are approaching the lender and requesting the terms of the loan be altered. You can ask for principal reduction and rate and payment decrease. Get your attorney involved in this process and be sure to request a release of liability in your offer to the bank.
Pros: Your terms would be changed so you could more easily afford the payments and perhaps the lender would agree to a principal reduction so you could sell the home without covering a loss.
Cons: You may not be able to remain in the home after a modification, the bank may be totally uncooperative and refuse any modification, your credit score will be reduced.
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Short Sale: If you or a Realtor can find a buyer for the home at a reduced price below your loan balance you may petition the bank for a short sale.
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Pros: The loan is paid off and the house is sold.
Cons: The bank may or may not agree to the discount and it’s a time consuming process for both the agent and you. There must be a cash buyer under contract before most banks will even consider a short sale. If the house is not listed the bank will likely require you to do so before even considering your request. The bank has the option of pursing deficiency.
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Let the Bank Foreclose: If all else fails this is an option and one many are taking.
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Pros: The loan and the home will go away.
Cons: Your credit will be lost and the foreclosure will remain for 7 years, the bank may pursue a deficiency, you could suffer a tax burden if your debt is larger than your purchase price of the home.
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Bankruptcy: This will stop the foreclosure but is not considered your best option if your real estate loan is the biggest reason for filing. One of the options above will relieve you of the home and the debt without the negative consequences of a bankruptcy. This choice should require a careful analysis with a bankruptcy attorney who has your best interest at heart, not his/her fees.
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Pros: Your obligation to pay your debt is gone and you buy more time to stay in the home before the bank completes the foreclosure process.
Cons: Bankruptcy remains on your credit for 10 years and is an ugly, unpleasant process. Your credit will be lost.
It’s true all of these choices have consequences and only you and your personal needs can dictate which one is the best for you.
However…..
One of the above options will apply to your home whether you make a choice or not…if you don’t choose, the bank will choose for you!