What is underwater mortgage?

This is a situation when you’re not able to pay on your mortgage and the mortgage debt is more than the value of your home. This situation doesn’t really arise on your first mortgage. But if you take out a second and a third mortgage, it may happen. Usually this situation may or may not be your fault. Sometimes due to the economic situation in the country, the value of the property in your area may depreciate and that may give rise to underwater mortgage situation.

How can you get rid of underwater mortgage?

You must try to get rid of your underwater mortgage as it may result in worse situation. There are quite a lot of ways you can avoid this underwater mortgage and build the value on your home. Take a look at the ways you can get rid of underwater mortgage and their effect on your credit score:

1. Short sale

This is one of the ways how you can get rid of your underwater mortgage. If you see that the value of your property is less than the amount you owe on your mortgage, you can opt for this option. In this, the homeowner decides to sell the property to the lender for less than what he owes on his mortgage. In some states, where the non recourse loan is applicable, you needn’t pay the deficient amount. The lender can take only the collateral and not anything else.

The positive aspect of this option is that you can avoid foreclosure and the credit score that is affected is 80 to 100 points. You may improve your score in 1 to 2 years. After that, you may take out a loan or mortgage.

2. Deed in lieu foreclosure

Apart from short sale, you can also go for deed in lieu foreclosure to get rid of your underwater mortgage and foreclosure. In this, you can deed your home to the lender in order to avoid foreclosure. The lender sells off the property to retrieve the unpaid amount of the mortgage (as much as he can). You need to sign a lot of legal documents when you’re opting for a deed in lieu.

This also gets rid of your unpaid mortgage debts and you can avoid the foreclosure proceedings too. The credit score gets affected a lot. The score goes down around 250 points but you need not pay the deficient amount. For both the cases of short sale and deed in lieu, you need to list your property before 3 months. You need to show that you’re facing financial hardships and then you’ll be taken into account.

3. Loan modification

This is better than the above two options. You can request your lender to modify your mortgage in such a way that you can make payments on it. You retain your property and you also get to increase the value for future use. The lender after reviewing your financial hardship can agree to reduce your interest rate or can increase the time limit. In really bad situations, your mortgage amount can also get reduced. But this usually doesn’t happen. You can avoid foreclosure and can also get out of underwater mortgage.

The credit score that gets lowered is also not that high. Around 150 points gets deducted if you go for loan modification program. Once you improve your credit score, you can become eligible for another loan or a mortgage.

Foreclosure can also help you get rid of your mortgage payments but the credit score gets damaged a lot and to become eligible to take out a loan or a mortgage, you need to wait for 3 to 4 years. The points that are discussed above can help you avoid foreclosure as well as help you come out of underwater mortgage.

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Fascinating

This investor wanted to cut down a tree to improve his curb appeal until he found out that local law required anyone cutting down a tree is then required to plant 3 trees… Wow, stiff but I like it!  Needless to say the investor opted to simply trim the existing tree.

I really think that banks, in particular those banks working on foreclosures, short sales and loan modifications, should be required to plant 3 trees for every file worked on and not approved.  I’m currently working on 3 loan modifications. I’ve had to refax the same documents multiple times because… maybe the T’s weren’t crossed correctly?  Then I call back the following week to follow up only to find out that I have to resubmit UPDATED docs because the first set is now outdated.

These institutions should be held accountable somehow for their wastefull practices and pure neglect for our natural resources not to mention the huge waste of the consumers resources… it is simply idiotic!  I have confronted them about this and they reply that they are completly electronic… they obviously don’t realize that the consumers are not typically as electronic as a billion dollar bank… we need to print a hard copy in order to fax it in!  And, they won’t except emails you have to fax it in! 

They should have to plant 3 trees for every file they start and don’t approve!