Photography by Don Becker, USGS
Most people think of real estate as a safe investment, and generally speaking, it is. The past few years it seemed all you had to do was buy a home, put in a decent down payment, and then sit back and watch your home appreciate in value each and every year.
Then we get hit with one of the worst slumps in decades, home prices fall through the floorboards, and many people find themselves “underwater”; meaning the outstanding loan balance on their home is higher than what the home is actually worth. Being underwater or upside down is more common than you might think, and it’s also one of the factors leading thousands of homes across the country into short sale and foreclosure.
If you find yourself underwater, not all is lost.
If your plan was to live in the home long term then being underwater really doesn’t change anything. You’ll continue living in the home and making regularly scheduled loan payments. Eventually the market will recover and your property will regain its value. In these cases, sometimes the best thing to do is nothing at all.
If, however, you have to sell your home or are having difficulty keeping up with your current payments, the following three possible courses of action are available to you. It’s a good idea to keep a cool head and seek advice from an expert prior to making a decision.
- Change the loan terms – If you are experiencing financial difficulties, if you’ve recently been laid off, or are worrying about that your interest rate resetting on an adjustable rate mortgage you might be able to claim a financial hardship and get your lender to modify your loan terms. To learn more about loan modification and refinance options, read the LendingTree articles: Making Home Affordable helps homeowners refinance and Loan Modification Plan announced.
- Bring cash to the closing table – If you find yourself in a situation where you need to sell, like a job transfer or change of employment, you’re going to have to make the lender whole before they release the lien on your property. If the sales price of your home doesn’t cover the loan you’ll have to bring the difference to the closing table in cash.
- Short Sale – If you don’t have the ability to bring cash to close you’ll have to sell it short. Your lender will have final approval over any sale, as they’ll be accepting a lesser amount for payment of the loan and a release of the lien. Know that this process can take time, sometimes several months. Also, most lenders issue a 1099 for forgiveness of debt, which is treated as regular income and may trigger a tax event for you. In some states, lenders even have the ability to come after you personally for the difference between the selling price of the home and the remaining balance on the loan. Before choosing to go this route, make sure you get all the facts from a qualified CPA and real estate attorney who can help you through the process.
