In this day and age, owning a home comes with a lot more caution due to the housing crisis that happened in 2005-2010. Since then, the entire housing industry is a lot more strict and the process to get a mortgage is much more regulated because the whole fiasco happened as a result of people not being careful. As a result, it is that much more difficult for the next generation to become home owners. In this article, we will go over how one finds themselves in this position and the best options going forward.
You Can Lose Money On a Home
While America has been in the process of re-building itself, the prices of homes have steadily increased since then. Unfortunately, there are still a lot of homeowners who were not as lucky and haven’t been able to bounce back. They are considered “underwater” on their mortgages, meaning that they owe more than what their houses are worth. Unfortunately, this is a hard reality to face and it is a situation that many homeowners are dealing with currently.
How Does One Become Underwater On Their Mortgage?
Homeowners never intend to be underwater in their mortgages. This happens to homeowners when the price of your home drops after you buy it. This situation is similar to buying a new car. Once you drive it off the lot, the value goes down because now it is considered “used.” Also similar to a new car that’s driven off the lot, if you wait long enough and your car is considered to be a “classic” the value will go up. With houses, the market tends to fluctuate meaning that the value of homes will go up and down over the years. If you find yourself to be in a pickle, wait it out and see if your situation improves. While becoming underwater is something that people most definitely want to avoid, there really isn’t a way to predict the future and ensure this doesn’t happen to you. The only way you would know is if you were very involved in the mortgage industry. When buying a home and going through the mortgage process, an appraisal of the desired property is required. An appraiser is someone who takes a look at the neighborhood and the homes nearby and then determines how much the home is worth based on the collected information.
One thing that you need to keep in mind during the appraisal process is that the appraiser will give you the worth of your home in that moment. They will not tell you if your home value will increase over time or if the value will fall. Because the home value will be determined based on how much your neighbors’ homes sold for, there really isn’t as much detail in the appraisal process as we would like. If you find yourself underwater several years down the line, it is not the appraiser’s fault. They, like you, can’t see into the future or know why housing prices are high. When they were giving out such high home values right before the housing bubble burst, it is because that’s what houses were actually going for at the time. While this was a strong contribution to the bubble bursting, it wasn’t entirely their fault. The reason why housing values were so high was really because people who were getting home loans could not afford them. In fact, because appraisers inflated the home values during the housing bubble, this process is now strictly regulated. As a result, appraisers are now giving more conservative home values and it is up to you whether or not you want to go forward with the home purchase.
What Options Do I Have If I Am Underwater?
Be Patient. The best option is to hold your ground and continue paying your mortgage. Yes, it’s not an ideal situation since you’re paying more than what the house is worth, but if you can afford to pay the monthly payments it is best to continue doing that. If you think about it, you can’t lose money on an underwater sale if you don’t sell your home. Also, housing values go up and down periodically and after the housing bubble, America has been working hard to re-build itself. As a result, housing prices are going up and if you continue to make your payments, it could be worth it since your home could be profitable once again. Since technically the definition of being underwater is paying for a mortgage that’s less than the home value, simply waiting would be the easiest option. This option takes a great amount of patience, but if it is something that’s doable for you, it would be best.
Home Affordable Refinance Program
If being patient is something that you want to do, but you simply don’t have the funds to keep it up, HARP is another option that could greatly benefit you. HARP stands for the Home Affordable Refinance Program and it was specifically designed for homeowners who are underwater on their mortgages due to the housing crisis. Being underwater on your mortgage makes it incredibly difficult for homeowners to refinance. HARP helps homeowners to refinance their loans so that they can snag a lower interest rate and then actually afford their monthly payments and finally pay off their loan. If you’ve applied for HARP in the past and got denied, have no fear. Simply paying your mortgage payments and other bills and in several months, try again. Since launching in 2009, major enhancements have been made to the program in order to help out more homeowners. It now has simpler guidelines and doesn’t require as much documentation as it did before in order to approve more loans.
In order to be eligible for HARP, you must meet these requirements:
- You can’t be late on any mortgage payments in the last 6 months. If you have been late, you can only be late once within in the past 12 months.
- The home you’re trying to refinance must be your primary residence, a 1-unit second home, or a 1-4 unit investment property
- Your loan must be owned by Freddie Mac or Fannie Mae (there are available tools to check if you’re not sure)
- Your loan was originated on or before May 31, 2009
- Your current loan-to-value (LTV) must be greater than 80%
You must make sure that you’re getting a HARP loan from a lender who is participating in the HARP program. While using HARP is free, you will still need to pay the closing costs that are associated with refinancing since you are technically getting a new loan. If this is something that you’re interested in, fill out this form and we can connect you to lenders that can help you get a HARP loan.
Rent Out The Property
Renting out the property is a great option in any circumstance. This will let you keep your property so you don’t actually lose money in the end. You only lose money on your home if you foreclose on the home or short sale. While there are some challenges to finding a reliable renter that you trust and also being a landlord, the benefits definitely outweigh the cons. Renting out the property or even the extra room that functions as “storage” would help significantly since they would be pitching in for the monthly mortgage payment. This will give you the financial breathing room each month that you want.
What Not To Do: Short Sale and Foreclosure
Technically these are options that you can take if you find yourself in this position, but I wouldn’t recommend it. Foreclosing or convincing your lender to do a short sale on your home are options that many took in 2005-2011. Thankfully, we’re more educated on the subject and regulations are tighter than before so going into foreclosure won’t be as easy as it was during this tumultuous time. Short sale and foreclosing basically mean that you are walking away from your property because you no longer want to deal with it. You do not want to take responsibility for your property anymore. Doing this can significantly affect your credit score and not in a good way. If you had great credit before and are willing to take this risk, you might still have a decent credit score after the blow. However, it is safe to say that getting docked that much in a single blow is enough to raise a red flag if you were to apply for a credit card later on down the line.
Of course, everyone’s situation is unique and while my advice doesn’t fit everyone, I urge you to keep in mind that there are options out there to help you. HARP is a great resource for those that are struggling to keep up with their monthly payments and can help them refinance into another mortgage with a lower rate so that your monthly mortgage payments are less and more manageable. Every unfortunate situation that you’ve endured until now eventually came to an end, so please believe that better times are on their way. When dealing with being in this situation, patience is the key to success so stick it out for a little while longer because things will eventually get easier and better.