If you are underwater in your mortgage—meaning you owe more than your home is worth—and struggling to make your payments, you might be considering walking away from your debt with a “strategic foreclosure.” This strategy became popular during the financial crisis, when property values fell to the point that one third of homeowners found themselves “upside down.” As a result, nearly 3 million homeowners received a foreclosure filing in 2009—a record high.
Although the housing market has recovered considerably since its collapse in 2009, some people are still struggling. Nationally, nearly 10% of homeowners find they have negative equity in their homes. Some metro areas have it much worse. In Chicago, for instance, 15.5% of mortgages are underwater.
What is an Underwater Mortgage?
When making mortgage payments becomes more difficult than expected, homeowners often consider refinancing their loan. Refinancing means you take out a new loan and use the borrowed money to pay off the old loan. The new loan might have better terms, such as a longer payment period or a lower interest rate.
However, this doesn’t work if your home’s value has decreased significantly. For example, if you take out a $250,000 mortgage, and then your home value decreases to $225,000, you are now $25,000 “underwater.” This means that you will not be able to refinance or sell your home unless you have $25,000 in savings to pay back the bank.
It’s normal to feel overwhelmed if you’ve found yourself in this situation. Know that many people have walked this path before and made it through. You have options.
Upside Down in Mortgage Debt? Here are Your Options
You have four main options if you’re unable to make your mortgage payments. Those options are choosing to stop making payments on your home, returning the property to the bank, arranging for a short sale, or declaring bankruptcy. Let’s run through the pros and cons of each.
1. Stop Making Mortgage Payments
Your first option is to quit making payments on your mortgage. This is called strategic default. This may buy you a few months, but the lender will eventually come after its money through foreclosure. Although this may seem like a good move on paper, make sure you understand the consequences before making this decision:
- Your lender can still come after your debt. Get ready for collection calls. Even after the foreclosure is complete, if the bank receives less than the mortgage amount for the home at the foreclosure sale, it may still sue you to collect the difference. This is called a deficiency judgment.
- It could land you a big tax bill. The bank might decide to forgive the remaining debt. However, the IRS views forgiven debt as taxable income, so you could be in for a surprise come tax season.
- It will damage your credit. Like regular foreclosures, strategic foreclosures will remain on your credit report for seven years. This may affect your ability to get loans of any kind, including a new mortgage.
2. Return Your Home to the Bank
You may be able to return your home to your mortgage lender. This may happen either before or after foreclosure has been filed. In both cases, the bank will agree not to pursue a deficiency judgment against you. It is best to consult with a lawyer before attempting to return your home.
3. Sell Your Home in a Short Sale
Another way to get out from under an upside-down mortgage is through a short sale. In a short sale, you sell your home on the open market and ask your bank to forgive any difference between the selling price and what you owe.
Short sales are complicated and time-consuming, and there is no guarantee that your mortgage lender will approve one. However, it can be a good solution if you can make it work.
4. File for Bankruptcy
Your third and final option to get your head above water is to declare bankruptcy. When you declare bankruptcy, you have the dual benefit of discharging debts while protecting your assets. You may even be able to keep your home.
If you are current on your payments and do not have significant equity in your home, you may be allowed to keep it in a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you will work out a payment plan to make your mortgage payments, including any back payments you might owe.
Bankruptcy will also protect you from collection efforts. If you do foreclose on your home, bankruptcy can wipe out the deficiency judgment.
Take Action Today
If you are underwater in your home, you need to take action quickly. At Benson Law Firms, we have helped thousands of clients file for bankruptcy protection, and we have the experience and expertise to guide you through this challenging time in your life. Contact us today at (800) 7-BENSON to set up your free bankruptcy consultation.