What Can I Do with My Upside Down Mortgage?

Question: What To do With My Upside Down House?

A reader asks: "For many years, my wife and I have been pretty much ignoring the fact that we have an upside down house, and we don't know what to do with it. For that reason -- and because we don't want to ruin our credit rating -- we've been hanging on to our upside down house. However, my wife just lost her job, so we have to make a decision now and deal with this. What options are available to us? What should we do with our upside down house?"

Answer: When housing prices first began to decline in 2005, many homeowners rushed to dump an upside down house. But many more held on. These homeowners, like you, watched their home prices collapse and some, I bet, have felt like the last captain standing on a sinking ship. There are a few options available to you however.

The Best Option for an Upside Down House

1.   Principle Reduction

The very best solution for that upside down house is to turn it right side up again. Doesn’t mean it’s going to happen, but if it does it’s the best solution. The way to do that is through a principal reduction program. The problem with a principal reduction program is your bank would have to forget about that portion of debt that is underwater, and not every bank will do this. In fact, very few banks will forgive debt in that manner. But you should ask your bank to do it….good luck.

You might ask why won't more banks participate in a principal reduction? Your bank is probably willing to do a short sale, which involves forgiving the debt.

Why won't the bank forgive the debt for YOU, a borrower who has made payments on time each and every month and is in good standing with the bank? Why are you penalized? And those would be excellent questions to ask your bank. They are also excellent questions to pose to Congress.

The Loan Modification Solution to an Upside Down House

2.   Loan Modification

Some sellers do not care that they will owe more than their homes are worth for years and years.

To these sellers, the mortgage balance is meaningless in comparison to the devotion they feel toward the home. They do not want to move under any circumstances. They are very happy if the lender will just lower their monthly payment through a loan modification.

These types of sellers are typically employed, and they can afford their payments but their mortgage payments often make up more than 1/3 of their gross monthly income. If they can pay less than that, they are satisfied….again good luck.

The Refinance Solution to an Upside Down House

3.   Refinance

If your home is underwater, refinancing won’t help you sell if for enough money to bring in a profit. But refinancing can bring some relief in the form of a lower interest rate and a lower monthly payment, something that might help erase the sting of being underwater.

The problem? Most mortgage lenders require that you have at least 20 percent equity in your home before they’ll approve you for a refinance. That won’t be the case if you’re underwater; instead you’ll have negative equity. The previous HARP program was pretty much a failure, so the government has modified its HARP refinance program. This is offered only for existing Fannie Mae and Freddie Mac loans. Most of the borrowers who apply for this program do so because they want to keep their home and they want a lower monthly payment, in addition to a lower interest rate.

Again, you will have to meet certain requirements to participate in HARP. Your mortgage loan must be owned or guaranteed by Freddie Mac or Fannie Mae and you must be current on your mortgage payments. You also can’t have missed any payments during the past 12 months. And even if you do meet these requirements, lenders don’t have to approve you for a HARP refinance. If your credit score is low or your income is not high enough, you might struggle to convince a lender to refinance your home even through HARP.

The main drawback is this program does not reduce the principal balance. It's similar to putting a gun to a borrower's head and not pulling the trigger for a while…

The Walk Away Solution to an Upside Down House

4.   Strategic Default

I suspect every person who works with distressed homeowners has touched the fire. Homeowners are angry. They start out in pain, but that can quickly quickly develop into hostility after they try to work within any given bank's convoluted system.

It's these frustrated and angry homeowners who tend to stop making mortgage payments and thumb their noses -- baring for the camera whatever they feel brave enough to bare -- and finally send the home to foreclosure. They think they are "sticking it to the man," but often they end up hurting themselves. 

Some homeowners convinced that their homes value will never recover, simply walk away from their homes. They stop making their monthly mortgage payments even if they can afford them. this is known as "strategic default". Some argue that this is unethical. Others say that owners shouldn't be expected to keep making payments on what has become a bad investment. Know, though that walking away from your mortgage will send your credit score plummeting. And when you eventually fall into foreclosure...the end result of a strategic default...this negative judgement will remain on your credit report for seven years.

The Give The House Back Solution to an Upside Down House

5.   Deed In Lieu

Nobody can give a house back to the bank because the bank didn't own the house in the first place. This is a misnomer. The bank does not take back a house. A bank might seize a home in foreclosure but it doesn't take it back. Banks will sometimes offer to let the owner deed the property to the bank. This is called a deed-in-lieu of foreclosure. It is often in the bank's interest and rarely in the owner's interest.

A bank or lender would hesitate before accepting a lieu deed where there are outstanding subordinate liens (2nd mortgage) or judgments against the property. In such a situation, the bank will have to foreclose its mortgage, with the attendant expense and time involved to obtain clear title. Even if the debtor promises to remove subordinate liens and encumbrances prior to transfer of the property, he/she may not be able to do so, especially where there are numerous liens or judgments outstanding.

If your goal is to stick it to the man, do not sign a deed in lieu.

The Short Sale Solution to an Upside Down House

6.   Short Sale

From a purely financial point of view, a short sale is your second best option, right next to a principal reduction. Because it gets rid of the mortgage debt. In some short sales such as a California short sale the process will free a seller from the obligation and liability.

There are many different types of short sales. To find out which is best for you, talk to an experienced short sale agent. Not every short sale is the same, and a slight twist made by an experienced agent can mean the difference between getting cash for a short sale vs. having your short sale rejected…Short sales can be challenging, though. Your lender must approve any offer you receive, even if you think the offer is good. If your lender rejects an offer, your sale will fall through. Some lenders won’t even consider a short sale. A short sale will also cause your credit score to fall and you get a similar ding on your credit as you would a foreclosure. Most realtors won’t mention that.

7.   Turn Your Mortgage And Home Over To Homeowners Relief Options

If the above options are not for you then consider the Homeowners Relief Program. Immediate Mortgage Relief.....Right Now! We take over...you move on.

Call (623) 738-4398 today! You can also email for more information here: Info@HomeownersReliefProgram