6 Options if You're Underwater on Your Mortgage

By Philip Brewer on 26 January 2009 (Updated 22 June 2011) 87 comments

Of all the changes you might make to live more cheaply, the most fundamental is finding a cheaper place to live. Sadly, it's an option that's largely closed to people who are underwater on their mortgages. Unless they have cash to cover the difference between what their house will sell for and what they owe, they're pretty much stuck. Here are six options for people in that situation. (See also: How to Check if Your Mortgage Statement is Correct)

Except for option No. 1, you'll definitely want to get legal advice well in advance of actually doing any of these. Situations differ and the rules are different in different states. In particular, the option to just "walk away" from a mortgage is not available in every state! There are tax consequences to doing that, and to several of the other possibilities. A consultation with a lawyer could save you tens of thousands of dollars.

With that proviso, here are the options I could come up with:

1. Suck it up.

If your house still serves as shelter and you can still afford it, there's no particular reason that you can't just go on living in it, pretty much without regard to its value versus what you owe on the mortgage.

This may be the most expensive option: You can't take advantage of the cost savings of moving to a cheaper place, plus you're putting significant amounts of capital into an investment that might never give you a good return. Still, as long as you can make the payments, this is probably the default option, and it's not necessarily a bad one. Eventually — no matter what happens to the real estate market — you'll be above water on the mortgage. (In fact, eventually you'll pay off the mortgage and own the house free and clear.)

2. Rent it out.

If you can rent the house for enough to cover the expenses of ownership, then you can move into a less expensive place and live there. In fact, even if the rent doesn't quite cover the costs, you can still come out ahead if you can find a place to live that's cheaper (and reliable tenants).

Less drastic than that, you could rent out a room. That could make staying in the house as economical as moving someplace cheaper. In fact, there's no need to stop at renting out just one room — if you have a big house, you could potentially rent out two or three. At the far extreme, you could move into the basement and then rent out the whole rest of the house to another family. Not what you had in mind when you bought it, but perhaps better than losing the place to foreclosure.

3. Short sale.

This is where you get the bank's permission to sell the house for less than the balance due on the mortgage. Sometimes the bank will settle for the sale price and wipe out the debt. Other times they still expect you to pay part or even all of the difference — the balance due is just converted into an unsecured loan. Even in the latter case, you at least owe a lot less money. (Of course, you also have no place to live.)

This is one case where you really have to check with a lawyer. If the bank forgives any of the loan, the IRS may treat that amount as taxable income.

4. Renegotiate the mortgage.

This covers a lot of ground. If your lender agrees, pretty much all the terms of your mortgage are negotiable — the interest rate, the number of payments, even the balance due.

The federal government is pushing several different plans to adjust the terms on mortgages to make them affordable. One that I've read about involves moving the rate down to market rates and then adjusting the balance down to no more than 85% of the house's current value. That might make the house affordable to keep. It might just make it affordable to sell.

If there was a temporary problem in making payments (due to something like illness or unemployment) that has now been solved, it may be possible to roll all the missed payments into the balance and start fresh.

5. Walk away.

In some places, mortgages are often made on a non-recourse basis — that is, the bank can take your house, but can't come after you for any balance due on your mortgage. (Check with a lawyer! This is not true everywhere — and even places where it is often true it isn't always true.)

Often better than literally just walking away is to negotiate what's called a deed-in-lieu, where the bank agrees to take the deed and forgive the balance owed on the mortgage.

The way to do this is to:

  1. Offer the bank a deed-in-lieu.
  2. Stop making payments.
  3. Continue to live in the house.

This gives you a certain amount of leverage, because taking your offer saves the bank the trouble of foreclosing (and the risk that you'll trash the house the day before they foreclose). It also (since you're living rent-free until the bank ether agrees or forecloses) gives you a chance to save up some money. (Save it in a different bank!) That's going to be important: You're going to need it to find another place to live, and your access to credit is going to be limited for quite some time if you try this option.

6. Bankruptcy.

Especially if a lot of your assets are in retirement plans (which you generally get to keep), bankruptcy is one option for households with an untenable cost structure.

Yet again, check with a lawyer. There are certain things that you get to keep in a bankruptcy, but they vary from state to state. Making the right moves before a bankruptcy filing can save you thousands of dollars. For example, the tools of your trade are usually protected, so you wouldn't want to sell them before the bankruptcy filing — you'd be turning a protected asset into something that's up for grabs.

Those are the options that I can think of, for people who are underwater on their mortgage, but who would like to consider the option of cutting their expenses by living someplace cheaper. Maybe one or another will turn out to be the right move for you.

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Guest's picture
Kelja

Let's let those who made bad decisions to buy a house, just lose that house. Let's let those who have been priced out of the market because of a 'false housing spike', be able to now buy those houses.

All this wringing of the communal hands! The two things lost in all the discussion of how to bail out the housing market are: the unfairness factor and the taking away the moral hazard. To bail out someone because they made a bad decision and are now sitting underwater is patently unfair to the neighbor who didn't do the same thing and now probably will end up paying for the mistakes of his unwise neighbor. To offer a bailout at all takes away any 'moral hazard' of making mistakes and will allow it to happen all over again.

Let the freaking market work. It simply amazing me that folks think that those who caused the problem, now can solve the problem. It amazes me further that anyone has faith in Big Government. Read your History.

Philip Brewer's picture

@ Kelja:

Speaking as a renter who was looking for a place to buy--and not finding one--during the period when the housing bubble was peaking, I'm with you 100% on the unfairness of bailing out people who bought houses they could not afford (thereby contributing to the bubble that made it impossible for me to find a house that I could afford).

Having said that, though, I have quite a bit of sympathy for people who are simply trapped by circumstances--owning a house that they can't sell, unable to get on with their lives because it's all of a piece:  the expensive mortgage requiring the high-paying job, the location of their house tying them to local employers, the whole thing making it difficult or impossible to change careers, go back to school, or just move on.

My article wasn't intended to advocate for a bailout, but rather to offer practical advice for people who have gotten themselves into such a predicament.

Guest's picture
UpSideDown

I can appreciate that many folks, including myself feel that anyone who is or was overextended should be made to take responsibility for the decisions they made.

But let's not lump all these people into one basket.

I purchased a home 5 years ago. I took out a conservative FHA mortgage at a low interest rate and made a substantial downpayment. I also invested in a new furnace, hot water heater, front door, windows and siding.

Also, I purchased a home about half the amount I was qualified by my lendor to borrow.

Now I suddenly need to sell my house because I'm being forced to move in order to keep my job. I put it up for sale at a price which would just allow me to break even and got not one single offer for four months. One relator suggested I put $10,000 worth of home improvements on my credit card to get my asking price. Another realtor thought I could get an offer if I listed the property at about $20,000 under my break-even point.

I was not in any way irresponsible. The market has been depressed due to large numbers of foreclosures. Not all of those are due to greedy buyers, many of them are people who have lost their jobs or had expensive medical problems. Many buyers just wait for the price to drop because they know prices are still falling and waiting forces more concessions of the part of the seller.

Why should I pour my life savings into a bank which is just going to ask the government for more of my tax dollars to buy a $45 million airlplane when I drive a 20 year old honda?

So feel free to be cruel. But just realize that being cruel says much more about you than it does about the people you are being cruel to! As the saying goes... "Mean People Suck!"

Best,
UpSideDown and broke

Guest's picture
Florida Gal

I am there in the leaky boat with you.

I bought in spring of 2007 with the plan of living in my house for some time. I am a well paid professional. I bought a reasonably-priced townhouse within my price range with an FHA mortgage and down payment. I thought I was being smart - the neighborhood is a good middle class enclave with attractive well-kept homes and many owners have been there since the development was built in the early 1980s. Despite the age of the homes, they are appealing and the location is very close to major commercial centers.

I spent several thousand dollars on floors, AC, appliances, and yard improvements. This sucks for all of us who were NOT speculators, were not greedy, and wanted to achieve home ownership.
Fast forward two years, and I am badly underwater. My boyfriend and I have been talking moving because we would like a more family friendly neighborhood and better schools, everything is on hold. Fortunately, my 6.7 fixed rate is not horrible, though I wish I could refi. it's a depressing scenario but we may have to hunker down and make improvements here, as the market is only dropping.

Guest's picture
Guest

I also bought a condo nearly 4 years ago at a price $10K under the similar neighborhood comps and WELL under what I could afford. I put about $5K in improvements and now will be lucky to break even as I have to sell since I'm being transferred out of state. Sad thing is, I can't rent the place out - we're not allowed. So I'm going to have to float an apartment and the condo until it sells then spend MORE money to sell it - no wonder people walk away!!

Guest's picture
Guest

My situation is that I bought a condo when, through no fault of my own, the market was high. I no longer live in the house, and the rent doesn't cover the costs. This does not fit into your simple scenarios.

I agree that the people who caused this should pay. The fault is the corporate banks and lenders who connived with Republican free-marketers to run without adequate checks and balances which always cause speculative bubbles.

Guest's picture
Guest

Don't be Cruel Kelja...You're assuming that all underwater mortgages are people who bought more than they could afford. There are a lot of people out there who can no longer afford their mortgage due to unemployment! We bought our 990 sq ft house 15 years ago and added a second floor 3 years ago to make some room for our 2 kids. Last year, my husband lost his job. At the same time our income was reduced more than 50%, we lost almost 50% of our home value as well. We just had the house appraised. I'm still in shock. We're underwater and stuck. The article was very informative, but not exactly encouraging for those of us struggling to make ends meet. Our bad decision was what? Not to consult a psychic before investing in real estate?

Guest's picture
Guest

I feel for you. I can't imagine being underwater after paying for 15 years. I am $120,000 upside down in Fort Lauderdale FL. A bank rep practically laughed at me when I inquired about a refi under the new federal 125% refi plan. I bought in 2007 when the market was still high but I thought it was reasonable (as did a number of my young thirtysomething cohorts). My house is not up to current code as I bought it as a fixer. I cannot afford to place cash in improvements in the house, and that just feels downright crazy with the current status.

If I lived in CA or AZ (nonrecourse states) I would have left already and walked. I try so hard not to dwell on this, but I am at that age (33) where I need to plan for a family and this house is just dragging me down and stressing my relationship.

Guest's picture
Guest

the fact that what happens to your neighbors will affect you. If you think that the banks will sell your neighbors home promptly, and that you will soon have new, more solvent neighbors, think again.

The following article, from the Huffington Post, describes a more likely scenario. The company that services the mortgage often lacks the authority (because the loan has been securitized) to agree to a sale for less than the full loan balance. Consquently, the property cannot be sold. No one will buy a property subject to a prior mortgage greater than the property's value.

http://www.huffingtonpost.com/2009/05/08/short-sales-banks-blockin_n_199...

[Edited by admin to remove full text of HuffPo article]

Guest's picture
Guest

Good post...but just to point out, you say it is unfair to the neigbhor who did not make the same mistake...the truth is that the neighbior's house was overvalued because people who bought houses who should not have...so the defaulters may be responsible for bringing the houses in your area down, but they are also responsible from lifting them up in the first place...so it is kind of a wash....

Guest's picture
Guest

Do you really think that is is the market working?
Isn't it really greed and selfishness working?

Guest's picture
John

Your comment is short sighted and ignorant.
The people who are underwater on their houses did not cause this crash. The thieves passing off the ownership of bad loans as grade A stocks did! The flippers who were giving kickbacks to signers the banks knew weren't capable of paying did!

There is a GIGANTIC difference between someone who owns a home that is no longer worth what is owed on it and someone who the bank knew couldn't afford the loan they were giving them in the first place. You're lumping everyone together.
For instance, I have perfect credit but my house is worth about 80K less than it was a couple years ago. I no longer want to live in my neighborhood because more and more of the homes are filled with renters after they were foreclosed on after the bank gave so many damn loans to people they knew weren't going to pay.

It would make more financial sense for me to file bankruptcy than wait for this market to recover. I could care less about ruining my perfect credit. I'll forever make more money and be a better risk than almost everyone in your dream scenario - where all these people who never made enough money to buy a home but now suddenly can because the prices are so low...

you're dreaming if you think the people who've in the past been incapable of so little as buying a home (when loans were freely handed out) are going to rescue the market because prices have dropped!!
anyone who never owned a home in the past (when loans were freely given out) will have an even harder time in the future!!

Guest's picture
Guest

My wife and I bought our house in 2004 during the mortgage high peak, we purchased our home for 220,000, with payments and escrow of a total ofnearly $1700.00/month. In 2008 we had our home appraised and it came in at $278,000, at this time we had purchased new siding and windows that were ready to be installed, the appraiser told us that once we had the siding and windows actually installed, the value would near or over 300,000. in 2010, we refinanced for a lower rate, in order for the refi to go through, another appraisal would have to be performed, at this appraisal, it dropped, it came in at 255,000, now do to the number of forclosures in our area, the median price range for our home is 97,680 - 124,320, and this was taken right off of our mortgage companies website, good ole bank of america. This is at the least a $176,000 drop in value since 2008 and a $131,000 drop since 2010. We are now currently with a 1 time refinance with cash out backwards/upside down in a loan of 110,000. We will be empty nesters by summertime and want to downsize our house size and mortgage amount but cannot due to being so upside down.
What the hell? How can people sit and say that it's our fault for buying the house, when that is what the houses were selling for at the time. I am sick to my stomach over the thought of all this crap, what to do?

Guest's picture

I really like your blog.. very nice colors & theme.
Did you design this website yourself or did you hire someone to do it
for you? Plz respond as I'm looking to create my own blog and would like to know where u got this from. kudos

Guest's picture
Guest

Kelja; You are incorrectly and unfairly lumping everyone who is upside down on their mortgage into one basket. I purchased a home 9 years ago, just prior to the real estate fallout. Once the fallout snowballed, my property became worth less than what I paid for it. I was not irresponsible, I did not ask for a handout nor did I buy a home that I couldn't afford. Additionally, I had one neighbor default and foreclose on their home, not because of irresponsibility but due to overwhelming medical bills when his wife became sick. Another neighbor also foreclosed on thier home due to a death of their spouse...a third neighbor foreclosed due to a divorce. All three of these foreclosures were on the same street as my home. All unfortunate but not one of them due to being irresponsible, sometimes life happens. Because of these foreclosures, the market value of my home went down. The value went down so far that I cannot sell my home for what I owe on the mortgage. I cannot refi it because of the appraisal value being below the current mortgage. So, before you start judging someone for things you don't know and/or understand, I would suggest you step back for a moment and realize that any one of these situations could happen to you.

Guest's picture

Excellent post! I haven't checked the value of my house in a long time, but I am sure it is less than my mortgage. I am still able to make the payments for now, but it's good to know that there are still options out there.

Guest's picture
Marcia

@Kelja,

I see your point, but the whole thing just sucks. My house is worth less than the mortgage. It's not my fault that it's worth less than the mortgage. I bought a house that I could afford. I just had really bad timing, buying in a spike because a whole bunch of OTHER people bought houses they COULDN'T afford.

But how am I supposed to time these things? Really? If I had a crystal ball, I would have bought in 1997 or 1998 and squeaked out the payments.

I would never consider "walking away" or such if I can still afford to make the payments. But we bought the house figuring worst case - we have to move to a different city to find work - that we could still sell the house. Now? Not so much.

Guest's picture
Guest

@Marcia-

I quote: "It's not my fault that it's worth less than the mortgage."

If you had put more money down, you wouldn't be under water. If you had refused to buy a home during a bubble, you wouldn't be under water. If you had bent the ear of all of your govt. representatives, you may have gotten them to do something to stop the insanity that created the bubble.

It sounds to me like you are at least partially to blame for your situation.

"The snowflake does not take blame for the avalanche"

Guest's picture
rob in madrid

that was true when the housing market first started to crash but consider the number of people who saved hard and put the 20% down payment down and now are underwater or in foreclosure. The simple fact is no one forecast a 50% plus housing decline and massive unemployment.

Guest's picture
Ian

Actually there were people who predicted this years ago. People like Ron Paul and Peter Schiff. Go to Youtube and watch any of the videos on there. Go to www.mises.org and you'll find plenty of articles on there. Read your history and you'll find plenty of people that have been warning us.

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered." Thomas Jefferson, Letter 1802 to Secretary of the Treasury, Albert Gallatin

Guest's picture
Guest

Don't make assumptions of fault... quite a few financially upstanding citizens were felled by the perfect storm of real estate greed.

For example: we relocated and bought a very modest house that we could afford 3 years ago. After saving for years, we put 20% down, and have a payment that we can still afford. However, values in our area have plummeted nearly 60%. Our only fault was not being able to predict the future.

Guest's picture
gilbert

WELL, MARCIA, ITS NOT OUR FAULT IF OUR HOUSES WENT UPSIDE WITH THIS WALL STREE CRAP. THAT IS SATANS ADDRESS, WALL STREET. YOU SOUND VERY CRITICAL, TELLING THAT PERSON THAT SHE IS PARTLY AT FAULT WHEN SHE ISNT. SHE TOLD YOU DETAILS, DIDNT SHE? I HAVE BEEN LIVING IN THIS TOWNHOME FOR OVER 15 YEARS AND MY PLACE IS UPSIDE DOWN AND I BORROWED ON IT TO FIX UP THE REPAIRS AND REMODEL THE KITCHEN. SO WHAT IS WRONG WITH THAT? I AM NOT A MINDREADER! I CANT FORESEE THE FUTURE. NO YOU WERE DEFINITELY WRONG WHEN YOU TOLD THAT PERSON THAT IT WAS PARTLY "HER FAULT". AND IF NEED BE, I WILL DECLARE BK AND ANYTHING ELSE THAT WILL KEEP MY SANITY IN PLACE. IM NOT GOING TO LOSE SLEEP OVER THIS SITUATION. WE HAVE A GREAT PRESIDENT AND HE WILL HELP ONE WAY OR THE OTHER.

Guest's picture
Dee

I see this posting is from Jan 2009. It is now September 2010 and my house, that I put 20% down on, is now underwater even more than last year, here in Florida. In fact, it is worth less than we bought it for 11 years ago -- back before the big boon. My husband learned last week that he may be out of a job within the next 2 weeks. We had a 20 year mortgage with a small amount of equity taken out for some hurricane damage not covered by the high deductible policies down here and some other home improvements. We thought the timing for retirement would be okay but now that has all changed. The house is not rentable as shown by the ever increasing empty houses in this once very nice neighborhood. It looks more and more like moving into an apartment and filing bankruptcy may be the last hope to try to save enough money down the road so we don't wipe out our savings completely. I don't think things have quite bottomed out yet here and local real estate analysts state that they don't expect values in Central Florida especially to recover to the boon days for another 20 to 30 years. No high interest rate here but increasingly higher taxes and insurance alongside ever decreasing values and high unemployment.

Guest's picture
Guest

Some of us bought our condo or house when we inherited money and needed to do it then or live on the street - not really our fault that the market was overpriced at the time, and sorry, not all of us are Ph.D. in economics, finance, whatever, - really did not think that the value would come down so much. I foresee a bunch of people filing bankruptcy to get out from under the water and I think I will join that boat. Now, if they could just add student loans to the list of debts that are dischargeable in BK, I'll be set.

Guest's picture
mingster

I disagree with you.. though time has elapsed even more... I can afford my loan but I am shackled to it. For out here in Maryland... my house is almost 200k less than it was in 2007 when I purchased. There is no plans to help us .. that have to move to relocate with work etc. This has gone from one of the best investments you could purchase.. to just about the worst thing on earth.. not only am I down 200k from original purchase price, but out the 100k improvements done on the house too. So figure that out.. Who really walks around with 300k to put on a house to keep it above water. And had I ... put 300k down and had to move.. wow.. sour... thats a 300k loss in 4-5 years...

Guest's picture
Guest

My husband and I have a lot of blame in our mess. We bought our home before the peak but took out a home equity line for home improvements and to invest some of it for the future. The investment tanked and our home improvements ended up being things like new ac units and fixing a leaking roof. Certainly not the remodeled bathrooms I was hoping for. Fast forward 5 years. We are upside down more than 100k our costs are all going up from food, to electric bills to a new 16yr old driver. Even with a 5% pay raise we are not able to pay all our bills each month. Although we can still "afford" our payment so we are stuck with a house that needs 30k in repairs soon (still not the bathrooms, etc) and no way to get out of it. We have excellent credit, and have never missed a mortgage payment but my credit card balances just keep getting bigger. Does anyone have any recommendations. We dont want to move but I dont see our financial situation getting any better in the next 5 yrs. In fact it will get worse as my kids get older.

Guest's picture
Larry

So...i should have given more money to bank (that is going to get bailed out) while I make my payments and still get screwed? That's my fault? Also...I don't know where you live, but bending the ear of a local rep doesn't do squat these days. It's not my fault I pay my mortgage and my equity is sinking lower then my balance. .....perhaps I should just walk away according to your logic because I shouldn't have bought a home?

Guest's picture
Kelja

You don't want to know how much money I lost in the stock market. You simply do not want to hear.

I could say, Not My Fault.

Where's my Bailout?

Guest's picture
Guest

The stock market is a LARGE risk... a home is a risky neccessity... As for how much money you lost in the stock market, don't gamble with money you can't afford to lose. As far as a home is concerned... we should all live on the streets???

Guest's picture
GuestJim Minnesota

Investment in a house is just another investment. Would you not dump bad investmets in the market that looked hopeless? A home is just another investment.
Dump it !!!! Buy another while it is low cost. That simple. You have no moral obligation to keep looseing investments of any kind. Do what is best for you and your family. Don't ride a dead horse....

Guest's picture
Guest

I do not read "bailout" in any of the options. Certainly Options 1 and 2 are ways to honor the original contract with the lender. I particularly like Option 2. Not a bad idea even if you're not in trouble. Options 3, 4, and the more communicative version of 5 are (re)negotiations that can occur with the lender. ie. you are already in a relationship, it's not going so well, both parties can (re)negotiate to minimize the damage that each experience. I didn't know that Option 6 was still a viable option after the new legislation. In any case, "bailout" is not directly mentioned here. I suppose the lenders can aggregate all their losses and go begging for money, but they're pretty good a cooking their own books to a self-serving end regardless of how we interact with them. That part is more of a political problem and, from what I read, beyond the scope of the discussion.

Philip Brewer's picture

The 2005 changes to the bankruptcy law add some obstacles, especially for people who make an above-average income.  But, if your debts are such that you'll never be able to pay them back, bankruptcy is still there as a last resort.

Guest's picture
Danny

I took a small buyout (thinking that my firm was a "dead man walking") at the end of November 2008. Now I am in defcon-4 mode of cash conservation and expanding the job search every 2 weeks. Assuming that we will have to relocate with a ~$160K mortgage on a house with a market value of ~$110-120K we are reviewing these options now. I think it's a pretty good job round-up of options. For me, I think we are planning to rent our house via a management company, then just rent a house wherever we have to relocate.

Not fun, but I really don't think I could look at myself if I just walked away.

Guest's picture
Ian

The sad thing is that people have been predicting this crisis for years now and not many people listened. At least we can take comfort in knowing that our governement will do everything they can to maintain their $1 trillion / year overseas empire, and continue giving billions in aid to foreign nations during this crisis. Yes, I am just a bit sarcastic about the whole thing.

Guest's picture
Logical1

Great post... I followed the link from The Simple Dollar to find it.

As a REALTOR, I wanted to put my 2 cents in on a couple of things:

1. We are starting to see that the loan modifications do not work (renegotiating the mortgage). Most of these mods fall back into trouble at about the 6 month mark. I believe it is mostly because people get that second chance but do not make the lifestyle changes they need to make.

2. If it becomes obvious that you are going to lose your house, you need to start as early as possible to pursue a short sale. Contact a licensed agent that works short sales and have them advise you along with an attorney (they will have one you can talk to). A short sale is your best bet once you hit the point of no return. They don't happen overnight, but they will save you a lot of headaches and can even allow you to stay in the house longer if the mortgage company gives the agent additional time to sell.

3. The Blame game. Come on people, there is enough blame to go around. From the government pushing the mortgage companies to make buying a home easier for those normally wouldn't be able to afford it, to the mortgage companies getting greedy and creating crappy loan products to make them look like a deal, to agents pounding the "buy now" drum, to people not educating themselves or buying more than they could afford. The only thing that is clear is that it has now hurt a lot of people who did the right thing by buying an affordable house and putting money down on that house. You simply can not blame one single segment for this mess.

4. Renting it out... This is a great option if you can do it. I actually have several clients that are in this mode right now.

Guest's picture
Ian

Upsidedown,

It's unfortunate, but it just proves that there is always risk to every action. It seems you would have been better off renting instead of buying, but unless you listened to people like Peter Schiff in 2006/2007 you wouldn't have seen this coming. Personally I put most of the blame on the federal reserve. If they hadn't lowered interest rates to ridiculously low levels, and hadn't decreased the required amount of reserves (fractional reserve banking), then there wouldn't have been so much credit available to be given out creating this artificial boom.

The sad thing is that we will be facing a double whammy once the market starts feeling all of the extra money they are printing. I have a feeling prices are going to be rising rather quickly.

Anyway, good luck to you.

Guest's picture
Aria

I am overwhelmed with my underwater situation. I bought a very nice condo in the beginning of 2004. It was my intention to keep it for a couple of years and sell, knowing that things would be tight budget wise. Well even a year after my purchase I found I had already lost the $20K I put down plus another $20K in value. I just found that an identical unit 2 doors down sold for $127K and that took a while. I owe $302,000!!! I know it isn't right to walk away, I did take on this responsibility but I really can't afford it. I've run up my credit cards to stay afloat and can't continue this any longer. I have be advised to just let it go and it's killing me since I've just missed my third payments on the mortgage and home equity...that was the way the original loan was issued in two parts. I've tried short sale with no lookers.

I'm open to any suggestions...
Desperate in Michigan

Guest's picture
steve

don't listen to the NAR scumbags, bank bastards, or wall street derivatives traders that drove this mess - stuff all your spare cash in an IRA, mail the keys to the bank and let them figure out what to do with the bad investment THEY made. The house was the collateral - let them have it.

Don't let anyone tell you you owe the rest of your life living in your debtors' prison home, only to merely get to ZERO 15 years from now. Housing prices will NEVER EVER get to the point they were at, so don't listen to these new lies from the NAR. Don't let them tell you you are getting off scott free either - you are taking the penalty of completely ruining your credit for 7 to ten years...but at least this is a sane persons' life, not sitting in the bottom of a chasm from which to climb out merely because you made the mistake of purchasing a roof over your head.

Guest's picture
Chris

I bought here in the Central Valley of CA. 2.5 years ago. I put down $100,000.00 cash 20% and financed 80% with a low fixed rate.

I did every thing right! I could afford my house but now due to the sagging electronics market my income is in the process of reducing by 75%. I owe $370,000.00 and current value of my house is around $200,000.00.

What are my options? I need to buy food pay child support and bills..

Guest's picture
Phoebe

In any market like this, there are cases of "bad luck". However, for those who took out additional refinincing, equity loans etc. to finance a lifestyle that they couldn't afford - and now expect a government bailout. To hell with you!

Anyone with an ARM should have read the contract and known what the rate could go to. If your rate went up, and you can't afford it. To hell with you.

Those of us who bought houses in the boom market due to relocations, and continue to pay on those houses, bear the brunt of your dumb decisions and should not have to bail you out also.

Guest's picture
Guest

Hey Douche Bag (and this goes for the rest of you "Suck it up" preachers)...how dare you generalize others in a situation that was not entirely under thier control. There are many reasons why these folks have gotten into thier situations. I was a signing agent at the time of the bubble and I have seen, in great detail, the promises that were made by these mortgage lenders. It wasn't all about people trying to live the "high life" or trying to purchase a home they couldn't afford. I did refi's. Many of these people were trying to consolidate debt and were promised that all their worries would go away if they just signed on the dotted line. Although I explained the paper to them, there loan officers made furture promises to them. "Oh, don't worry about the rate, we can get that lowered in 2 years after you improve your credit." So lenders we giving money not based on income and credit score, but on the current value of thier home. People would get an initial low rate, but after two years the rate would adjust. That deal also came with a two year pre-pay.

There are others, though, that could and still can afford thier house. I am one of those. What is bothering many is not about affording the mortgage, it's seeing that if they bought thier same house now, they could reduce thier mortgage by 1/3. My house in 10 years probably wont reach the same value it had 3 years ago. So while I'm making my payments and have excellent credit with my lender, all I could hope for is to break even one day. Whiel others who are now purchasing thier homes, in the same time frame it take me to break even they would have tripled thier equity. SO...for people like me, the decision is....do I want to spend all this money and interest just to break even in another decade or more...OR just walk away, take the hit for two years, and then buy another home and start earning positive equity? As an investment...that may be the wisest decision.

Quite honestly, the only reason most people DONT walk from thier house is the social stigma and pressure from the banks, govt, and media uses to make people feel worthless or irresponsible for walking. Nobody wants to feel like less of a person with a foreclosure on thier record. AND THE BANKS KNOW THAT! And they have and will continue to play on our self worth to satisfy thier bottom line. You real estate agents? Well, Im sure there are a FEW that mean well, but proceed cautiously to thier help. Remember, their "help" cost you money and puts cash in thier pockets...so thier advise is biased.

I'm not going to walk. Perhaps the banks have gotten to me, but as an investment decision..it is a poor one. Perhaps renting out the two available rooms I have is the best solution.

I will say this...It's those of us who havn't walked from our homes that are helping the prices from dropping even further. New home buyers get a tax credit. Where is the tax credit for us who are sticking it out?

I got a little side tracked. My point is that you can take your arrogant attitude and ignorant opinions on taking responsibility and shove them up your ass. Everyone's situation is different. Not everyone is looking to bail on thier responsibility. The real question is: is it really thier responsibility?

Guest's picture
Guest

Kelja...

1.Husband forced to transfer with job in order to keep his job.

2.Mom working full time.

3. Only child gets terminal illness.

4. Mom MUST stay home with dying child.

5. Crappy health ins. provided by Husbands employer only covers 80% of medical treatment.

6. Family must pay doctor in order for child to continue treatment.

7. No credit card debt and only 1 car pmt.

8. Put 10% down on home to get loan to reasonable pmt.

9. Mtg goes 120 days past due.

10. Home is now in foreclosure.

Tell me what you would do. Try not to throw stones. you never know when you may have a sick child. I pray that you never know that heartache.Need help from somewhere. Have been faithful taxpayers for 37 years. What's wrong with a little gov't help to those who REALLY need it.

Guest's picture
Guest

My fiance and I moved to Nevada in 2006 for a job transfer. We purchased a home at that time because we had animals which most landlords will not let you have. We both make VERY good money, and paid $275,000 for our house. {in this area, that was reasonable so we did not buy more than what we could afford} We still own our home in the Seattle area and are renting it out. Both of us are responsible adults, pay our bills on time, and can afford both of our homes. HOWEVER, because of the current market, we are now almost $125,000 upside down in our mortgage for the home in Nevada. Our mortgage will reset in 2 more years, which I have no idea what the interest will be. I will not continue to pay for house that will never be worth what we were told it was worth when we bought it. People are quick to blame the homeowners for their inability to pay, or walking away from their homes. The reality is apprasiers told us and the banks what the house was worth when we were buying the house. The mortgage company was quick to loan us the money according to what the apprasiers said it was worth. I don't hear any blame going towards them, only the people who got caught up in the mess by no fault of their own. I will get my mortgage reset or I will file chapter 13 to wipe out part of my debt. The bank will get bailed out anyway, so in a round about way, I'm paying them.

Guest's picture
jazzage

I am sick and tired of people who say that "it is not fair" for people to get help or walk away from a mortgage, etc. Guess what, life is not fair!

First, if your neighbors lose their homes in a foreclosure, you will be affected by having vacant homes that attract criminals, teenagers looking to party, poor maintenance, etc. You woul dbe better off if your neighbors could arrange a short-sale, and no worse off if they just walked away. Unless you live by yourslef on a island, you will be affected by the society around you, just as you affect them.

Second, any society has a ruling class that rigs the game. The government is always on the side of the ruling class to one degree or another. The banks got away with thievery aided and abetted by a bipartisan effort for decades. The mortgage lenders took a bigger risk them individual lendees and should have done their due diligence but the buys at the top were more interested in their bonuses than then health of their bank. And for the majority of people who did the right thing and now find themselves unemployed or deeply underwater, why should they not look out for themselves? The corporate elite always look out for number one so it's time the rest of us did as well.

Guest's picture
JohnB

Here's the thing that people like Kelja do not understand.

There are those who bought a home hoping to flip it and get rich.

And then there are those, with a family, who did everything they could to get their family into a home - to do the right thing.

It is not my fault or doing that the banking industry made what amounts to fraudulent loans, running up the prices while Wall Street partied on the profits. To me this is no different than insider trading.

Where my family is concerned we survived a house fire with a home we were renting. Given what rentals were going for in our town we couldn't justify paying that - we felt we had to make the move to buying or to leave.

The point here is simply that not *everyone* sought to make a quick buck and now we're looking to get bailed out. My feeling - especially after receiving a letter today from our HELOC that our line of credit is frozen AFTER we've paid off $40,000 of that in the last 3 months - is we've been screwed and the banks will screw anyone they can. The banks, the investors and everyone involved in the big money party profited - now I'm supposed to foot that bill because the cat's out of the bag?

To hell with that Kelja. If you gambled your money in the stock market, that's one thing. This ain't the same - not at all.

Guest's picture
Robert

Yes, the current situation sucks for everyone. However, what bothers me the most is that the most irresponsible have been let off the hook first, forcing the less irresponsible to fend for as long as they can, and now the responsible people are the ones who are really being screwed. We are rewarding bad behavior and punishing good behavior.

Guest's picture
denise

Kelja and whoever else, stop you're bitterness. This is not a moral isse for those needing to walk, it's a business decision. The Banks are getting bailed out, the average household not so much. Obama's housing plan is a joke and these loan mods are very hard to get. Don't get caught up in the guilt of letting a house go back to the bank, the deal is you pay or they take the house. Period. Just cover yourself first with a Bankruptcy it will protect you from getting your wages garnished on the defiency amount, and taxes. Unfortunately, it's on your credit, but guess what you can purchase a house again in two or three years after a foreclosure or bankruptcy. FHA loans 2 years...and you get the same loan terms as those with great credit.

Guest's picture
Guest

I don't understand people's comments about why they should have to pay back a bank when their house isn't worth how much they owe. Here's the reason...because the amount you owe is the amount the bank paid the person from whom you purchased the house. When you buy a new car, most people are immediately upside down on that purchase...do you plan to not pay the bank back all that money either? And then you wonder why it has become harder to get a loan. Why would any business continue to make loans knowing that nobody takes responsibility for paying them back...and then blame the banks for making the loans in the first place.

If you take money from someone...you pay it back based on the terms you agreed to...plain and simple. If you don't like the terms, don't sign the paperwork.

Guest's picture
Guest

Because the difference is that a car might be under a couple thousand dollars, but homes are underwater by 10s if not 100s of thousands of dollars. Quite the difference.

Guest's picture
SA12

What we're really talking about is who should win and who should lose. The options in the article are aimed at the current set of losers who became losers from the chain of unfair activities that have taken place in the form of bailouts and loan modifications for people defaulting. What should have been done from the get-go is no intervention, let the bad loans forclose naturally, my third point sounds extreme but I heard about a city that did this and I think it makes sense: remove the forclosed home (make it an empty lot) - this idea could work as the home would not exist to be sold at a lower price and therby not bring down other values - there would need to be a way to offset the loss to the bank maybe in the form of a write off. This process would remove the glut of homes and prevent home vaues from dropping.

Guest's picture
Guest

I'm sorry but your logic is flawed. Reducing the number of available homes will serve to drive down supply and drive up demand - which, unfortunately, will result in driving up (at an unreasonable pace) home prices and be the inception of another market bubble.

Guest's picture
Guest

Kelja, many of us are military. Please think before you speak. We don't always get to choose where and when we go. We deserve to own a home, a home we were able to afford and have always been on time with payments by the way that is outside of our workplace (the base, post, etc.). The timing was just bad and the drop in the economy has coincided with many permanent change of stations. You're entitled to your opinion, but before you write us all off for idiots, these idiots are dying for and defending people like you.

Guest's picture
Guest

Ok, here are my thoughts. I am a very moral person. And, I guess I really don't have a lot of sympathy for ANYONE in this mess. Including myself. Now, before you think I'm badmouthing anyone, let me explain. I'm in the same situation. I owe more than $100K than my house is worth. My circumstances don't matter, just like yours don't. Of course they matter to you, but they are personal to you. Whether you meant this to be a business transaction or not,.. It is. deal with it as a business transaction.

Basically, when you buy anything, it is an investment (unless it's a consumable, but even then the price has to be right...). When you buy a house, I'm assuming you all know how to read or at least listen to a presentation of what you will be signing. You should have known of a "chance" of the market going down. If I buy stock in the stock market, and it goes down, then I sell it. OR if I feel it still a good investment, I buy even more at the reduced cost. You all need to consider the investment of your house. If it lost so much money, then sell it.. rent it... walk away.. etc. It's NOT A BIG DEAL. It is life. We all just happened to make investments at the wrong time, OR the market decreased enough to catch the rest of us with our pants down at the wrong time. What ever your situation is, you should realize that "YOU HAVE NO IDEA WHAT OTHER DECISIONS ARE BEING MADE AROUND YOU BY OTHER PEOPLE OR BUSINESSES". They are all trying to make money. Money makes the world go round.

NOW.. What I'm trying to say is that you bought a house to be in for a short time or a long time to make money or have a place to live. It was an investment either financially, or for your family. The banks and lenders made an investment to make money... hence the interest rate they charge you. If you default, you will loose out on future investments in the increased costs to you. The banks should loose out on their investments too. But the BANKS GOT BAILED OUT!!!. They should have FOLDED. They should have had to pay for their bad investment in the market. Just like we are expected to.

It's not 100% your fault. Quit beating yourself up about it. I have a philosophy on life. I live my life by it every day. Lots of unexpected things happen. It's a little crude, but here goes....
Crap Happens! Deal with it! Move on!
What I mean by "Deal with it!" isn't meant to be a slap in the face. It is meant to be more of an "assess the problem, figure out a solution, fix it or don't fix it" . But the most important thing is.. Move on. Don't dwindle on the "woulda, coulda, shoulda" part any more than you have to.. to learn from your mistakes.
You've got to take control of the situation and make it the best you can. If you are in way over your head, then take the loss and move on. You will have to pay for it in the long run, but that's a decision that we should have known we'd be making from the beginning.

Whatever decision you have to make right now, for you and your family. Get informed, and DO IT!. You will thank yourself later for all the stress you saved yourself trying to feel sorry for yourself or get others to feel the same way.

Just my $0.02

Guest's picture
Guest

Its great to see all the empathy on this board. I bought a house, not during the bubble, back in 99, but now my house is worth one third of what I bought it for, one third. The house I got was a 3 bedroom ranch with 85K household annual income, in a blue collar neighborhood. With the payments I am making now I could afford a giant house on Lake Saint Clair. We put a 30K down payment on a 145K home. Our market value today is about 20K which is less than the downpayment we made. I find it humorous that the bankers who are mainly to blame are giving themselves 30% more bonuses. I guess since they hate Americans, they deserve the increased bonuses.

So, I get to pay taxes to pay back welfare for the millionaire club and I am supposed to suck up the blame all the while fattening up the bankers wallets by paying 7 times market value? More innocent people were hurt in this fiasco than guilty and those most guilty got a raise for crashing the economy, increasing the suicide rate, making families homeless and some of you on this board choose to blame the peasantry. Its painfully obvious that the whole system is designed to keep the honest middle class as poor as possible and enrich the good ole boys club while they commit their crimes, golf and sail on their yachts. Let me get a box of tissues for those whining for the poor bankers.

Guest's picture
RLM

I put 15% down on a new home in 2006....from a builder who lowered prices on the same home, in the same subdivision, by over $250,000.00 within 6 months? I'm now underwater and there is absolutely nothing that I can do about it. The builders are protected - the banks are protected - the homebuyers are not. Go figure. Shouldn't people in this situation be able to recoup? I won't even get into the numerous problems that I've had and continue to have with the home.

Guest's picture
Charlena

Three years ago, we opened a business by getting an SBA loan from a bank. The loan was secured by a 2nd deed on the home. My husband unexpectently died in July '08, the business then tanked in 2009, in which I ended up filing bankruptcy in Sept. It was discharged in January '10.

The bankruptcy attorney said that I personally would no longer owe the remaining balance on the 2nd deed, however we did reinstate the first mortgage and I got to keep my car payments.

The home is valued at approx. $120K, the balance of the first mortgage is $100K, and the balance of the 2nd mortgage is $74K. So my manufactured home is really underwater.

The first mortgage was re-amortized from 15 to 30 years right after my husband died (because I couldn't afford the payments on the 15 year mortgage by myself), but they are expecting a balloon payment at 15 years.

I have a boyfriend who now lives with me, and with both our incomes we can afford to keep making payments on the house just fine. But I'm wondering if it will really be worth it in the long run...

Any thoughts??

Guest's picture
dmbarr

There's a free informational ebook and video that explains how to payoff your mortgage in 90 days so you wouldn't have to worry about foreclosure ever again? It's great information and a helpful tool if you are upside down.

Philip Brewer's picture

@dmbarr:

I couldn't be bothered to follow the links beyond the first, but this bears all the marks of a scam. They're making too-good-to-be-true promises while providing no actual information, and then trying to get you to click on more links to get "free" information.

As I say, I didn't bother to click through further, but I rather expect that the "free" information makes grandiose claims while offering no evidence, and then (after another click or two) turns out not to be free after all.

Guest's picture
Guest

SA12 - I'd love to find out more about that city that just starting tearing down the foreclosed homes that remained empty. I've thought for a long time that is what we need to do in our city. Many of them are in poor to horrible condition - they make neigborhoods look bad and they drag down values because they are appraised so low. There are probably twenty properties - business and homes - in a one mile radius of my house that have sat empty for years - slowly deteriorating and bringing everything else down with them. I'm underwater (not badly and not anyone's fault - it just is what it is. Ten years ago the same decision would have been just fine, and I bought because I wanted to own a home, not make a killing. I just view myself as "renting" again.) I really worry more about what these empties are doing to our city - turning it into a slum. What city starting tearing them down? I'm really, really curious. Please tell us more!

Guest's picture
gladiator

I say let homeowners and consumers do the same things big businesses do. They wrtte off losses, walk away from bad deals, renegotiate terms on contracts that no longer make sense (including multimillion dollar mortgages) get bailed out by the government (YOU the taxpayer actually) for billions of dollars worth of bad decisions. Big banks use mafia like tactics to lock millions of people into high interest credit cards, sold billions in risky assets to unsuspecting investors. Where's the MORALITY there? Why is it wrong or a moral issue when we try to help consumers? Corporate welfare is good but helping the consumer (the engine that actually drives this econmy) is wrong? Help me understand!!!!

Guest's picture
Guest

Its not just about "To bail out someone because they made a bad decision and are now sitting underwater is patently unfair to the neighbor who didn't do the same thing and now probably will end up paying for the mistakes of his unwise neighbor." I currently pay my mortgage on time all the time and have excellent credit. I do not agree with everyone around just giving up their homes and running away from responsibility, but you get to a point like me, where you are basically never going to make back what you even bought the house for in the first place. When you own a home and you get a statement from the county assessor that your house is valued at $105,000 and next year it will value at $88,000...sorry but your heart jumps a little. People like me that can pay my bills on time, get no kind of help in this situation and im stuck paying for everyone else's "mistake" as you called it. But, I will probably end up walking away from my home at some point because I dont have a choice.

I bought my home for $215,000 4 years ago...when will I ever even make that money back? I am 28 years old and worked hard to build good credit for myself, at this point I have 6 homes on my street that are for sale. I probably cannot even rent out my place because, I have houses on my street that might rent for less. If banks are not willing to work with people who are still "paying for everyone else's mistakes," all we will see are more people walking away.

Oh and to top it off...taxes still have not gone down. So the value is wayyyy down on my home, but taxes keep going up due to other people's mistakes. The only people to point the finger at, are at the banks. Thank them for allowing pretty much any walk of life to buy a home when everyone was money hungry.

 

Guest's picture
Guest

Its not just about "To bail out someone because they made a bad decision and are now sitting underwater is patently unfair to the neighbor who didn't do the same thing and now probably will end up paying for the mistakes of his unwise neighbor." I currently pay my mortgage on time all the time and have excellent credit. I do not agree with everyone around just giving up their homes and running away from responsibility, but you get to a point like me, where you are basically never going to make back what you even bought the house for in the first place. When you own a home and you get a statement from the county assessor that your house is valued at $105,000 and next year it will value at $88,000...sorry but your heart jumps a little. People like me that can pay my bills on time, get no kind of help in this situation and im stuck paying for everyone else's "mistake" as you called it. But, I will probably end up walking away from my home at some point because I dont have a choice.

I bought my home for $215,000 4 years ago...when will I ever even make that money back? I am 28 years old and worked hard to build good credit for myself, at this point I have 6 homes on my street that are for sale. I probably cannot even rent out my place because, I have houses on my street that might rent for less. If banks are not willing to work with people who are still "paying for everyone else's mistakes," all we will see are more people walking away.

Oh and to top it off...taxes still have not gone down. So the value is wayyyy down on my home, but taxes keep going up due to other people's mistakes. The only people to point the finger at, are at the banks. Thank them for allowing pretty much any walk of life to buy a home when everyone was money hungry.

 

Guest's picture
Guest

I feel for you. I'm still dutifully paying for my home bought in 2006 for $220,000. Now it is valued at $130,000. All I want is a lower interest rate, and my bank will not budge. Responsible people ARE being punished.

Guest's picture
Guest

Sounds exactly like my situation. No help. I can afford it and will be able to, but i now have to drive 50 miles each way to work. With these gas prices? The gas is still cheaper than the 40-60k loss i could not afford by selling the house. I dont even bother contacting the banks. Should i?

Guest's picture
Ann

We bought our home in 2004 knowing we'd have to put some money into it. This was a starter home for us. We got a FHA loan, a decent interest rate, and a payment we could afford. The value of the home went up for awhile and we (probably stupidly) decided to take out a home equity line of credit on it for various reasons, thinking we'd sell it and everything would even out. Fast forward 6 years, and we are now severely underwater on our home. The value has literally been a roller coaster.  We can still afford the home but things are very tight due to my husband's unemployment.  In the meantime our family has grown and we'd really like to move.  We've accepted the fact that we're just stuck for now and hope for the market to rebound soon.  

Like I say all the time, we're lucky. We have a lot that others don't have right now.  And even though we won't be taking any major vacations or making any major purchases, I have a healthy and happy family.  

Guest's picture
Guest

Your situation sounds just like mine. We can still afford our payment although I probably have to put 300-500 dollars on credit cards each month. I have 5 kids which I already had before we became upside down in this house. My expenses are going up and I see no way out of this. The question I keep asking myself is WHY? Why keep paying on this house which I dont think we will ever break even on. Its going to need household repairs soon that I cant pay for. The banks wont do anything because we havent missed payments and dont have a hardship other than general life is getting more expensive! (food, electric, water. Everything has gone up the last 2 yrs)

Guest's picture
Timmy Titus

Go Gators

Guest's picture
Timmy Titus

Go Gators

Guest's picture
Anon

I bought a home with an ex in 2005, fast forward 3 years and I ended up getting the loan, her name was taken off not through a refi, I should've fought it a bit more and well an ill conceived thought that the market would go back up and it would never sell came up. I wasn't really in the right mind at the time and went very back and forth on whether I want the house at the time. I was actually surprised I got the loan as it's like half of my paycheck of the month.

2010 rolls around and the house was 120,000 in 2005 and is now like 95000 or so. I can make the payments OK, but it's disheartening to see I've paying through the nose when the neighbors house sells for 85k or when someone buys a hosue for 60k that's nicer than mine. I know I'm somewhat stuck as it's just a series of bad decisions without knowing the eventually outcome.

What are my options? The home isn't very big so it's not very rentable, I'm also not too comfortable with renting either. A realator said I might, might be able to get 105 as FSBO, but the thought of FSBO scares me, I'm like 25 now and well I don't know anything about really buying or selling a house. I'm going to contact a few more realtors to get their opinions, but comparable sales nearby arn't promising, honestly it looks more like 95k. FSBO? Realtor? Short sale? Foreclosure?

It's a FHA loan and I do currenty have a job which I was previously approved to take over the loan with so it's not like I'm financially stressed as it would concern them. To me I would consider it so, I've been pretty much cash strapped since I took over the loan.

I would like to switch to a lower cost foreclosure in the country, but I know my expectations are most likely too ambitious. I was thinking of renting for a year or years (5-7) to acculmalate wealth and buy again once the market takes another crap. I also thought I could live at my moms for a bit as well in the interim.

Any thoughts are appreciated. The anxiety of all of this is just a bit too much. I don't want to be stuck paying through the nose when I have a better financial route, but I also don't want to make a hasty decisions and dig myself deeper in a hole. Also, on a side note if I did foreclose or short-sale would that effect her at all since her name was taken of like 2 years ago?

Guest's picture
Anon

On a side note, I'm single and have no kids with a dog. So I don't really have any attachments.

Philip Brewer's picture

In general, my thinking is this: A house is primarily a place to live. Letting investment thinking drive your housing choices is usually not the best plan. If you like your house and want to live there, then it may be worth paying up to keep your house. If it's just a place to live, you'll probably come out ahead by cutting your losses—find some way to sell, pay off what you can, find a cheaper place to live, rebuild your finances.

As a practical matter, that's hard to do. Unless you have enough money to pay off the difference between what you owe and what you can sell it for, you'll end up damaging your credit for years to come—and that's the best case. If you don't get all the legal stuff right, you can end up with the bank coming after you for the money years later, after you'd thought your try at house ownership was just a bad memory. So, get good legal advice before doing anything drastic.

Trying to sell the house yourself is probably harmless, but unlikely to be successful unless you both set your asking price at the market price and work pretty hard at marketing it. Asking above market and then just waiting in the hopes that someone will come along and decide pay it is not likely to work.

I do have one useful thought for you, though: Don't imagine that waiting now will mean that you'll have to wait for another full cycle to get a house. After a crash like this, it takes years before house prices go back up again. Many years. I wouldn't be a bit surprised if 5–7 years from now houses are still quite cheap relative to the peak of the bubble. I wrote a bit about this in a post called Don't worry about missing the bottom in houses.

Guest's picture
Guest

i think everyone that is underwater should stop making their payments and stick that money in a separate bank account just in case they will work with you on a principle reduction. Just wish the federal government owned fannie and freddie would at least be willing to help those of us that are over 50% underwater now that the value of my house went from 164000 to 65000 and all I did to lose that kind of value is put in a 4000 dollar paved drive I believe the banks and wall street greed caused most of this crisis and they still want me to pay 100% of the money back to them when they caused more of the decline than I did I feel they should absorb some of the loss at least 1/3 they were at least 1/3 at fault why should the banks be the only ones made whole i this situation.
I can afford my payments even after the 20% cut in pay I had to take so they wont work with me or help me. I tryed to get them to roll in my 10000 second mortgage balance into the 100000 i owe now at the lower intrest rate I could get with my high 700 credit score, for a 15 yr note as i still had 15 yrs to go on my mortgage would of saved 200.00 per month X 180 months savings of 36000 everyone would get paid 100% CITIMORTGAGE would not go with that as they said my home value declined to much to be able to refi for that ammount. So now it try to get them to reduce the principle to what the home is now worth or they will get it back as soon as my other house is remodeled so I can get the most out of it then sticking that money along with my payments into another bank account and I will still live in my house till they start the forclosure then I will find a house to buy with the cash that I will have in the bank and SCREW CITIMORTGAGE THEY CAN BURN IN HELL IF THEY DONT WANT TO HELP PEOPLE THEN PEOPLE SHOULD RETURN THE FAVOR TO THEM, FANNIE AND FREDDIE.

IS IT MY FAULT THE BANKS DONT OR WONT WORK WITH PEOPLE THAT CAN AFFORD THEIR PAYMENTS? NO!!! BUT THE BANKS THAT THINK THEY HAVE ALL THE CARDS ARE WRONG. THEY CAN BUT WONT WORK WITH PEOPLE THAT ARE MAKING THEIR PAYMENTS SEEM TO ME THEY ARE TRYING TO FORCE PEOPLE OUT OF THIER HOMES SO THEY CAN GET THE MONEY FROM THE GOVERNMENT THAT IS BACKING FANNIE AND FREDDIE GOOD JOB WASHINGTON LOL SHOULD OF LET THE BANKS CRASH BUT THIER PORTFOLIO WOULD TAKE TO BIG OF A HIT GREEDY BASTARDS IN WASHINGTON ALSO NOT JUST WALL STREET

Guest's picture
Guest

Yep....Still the same story and it's almost 2 years after this article was written. My house is now worth 77k from the 265k I paid in 2006. And, I hears we should expect at least another 10%-15% drop over the next 2-3 years.

So now what? I can afford my payments...but like many others in my situation, I don't want to. So, why should I when all of my neighbors who walked 2 years ago are now enjoying positive equity in thier new homes?

This is a train wreck. I just want a home with positive equity, as it should be. I'm not trying to make money or rip anyone off. Actually, looking through my bills for the past 4 years, I have already paid the bank approximately 100k. I still owe 258k in princlple. They've made thier money.

I was going to stay, but I'm not so sure anymore.

Max Wong's picture
Max Wong

If you are planning on renting out your house, FIRST renegotiate your mortgage as your primary residence, THEN rent it out. Banks are moronic in their insistence that you'll default on your rental property, even if it's your only property and your income generator.

Guest's picture
Axel

Here is one for you. We purchased our condo in 2005 at a height of the market at an interest rate of 6.75%. In 2009, we decided to put the condo on the market, because we wanted to avoid foreclosure. After lowering the asking price 3 times, the condo still did not sell. As an alternate, we decided to look in to lease to own option and actually, found someone who was interested. We agreed on a monthly lease payment, a purchase price and a one year term. Now here comes the kicker. After the term of the lease (the lessee had dragged her feet to purchase)was up, the condo had depreciated not only far below what we had originally agreed on. But also, below what we owe. We are stuck now, because, best scenario would be, she pays what we owe the bank and we would walk away +- zero. But that is still 100k above what the current market here is holding. The deal she wants would mean a short sale for us. We cannot refi either, because we do not live in the property. Luckily, she is still paying our interest only loan with her rent, but if she decides to look for another, cheaper, property, we are screwed, because her rent payment is far above market. Our fault....I don't think so. The condo was meant for us to live in, not investment property. The situation changed drastically. You live and learn.

Guest's picture
Guest

Here is my question for you, ladies and gentlemen, if I decided to walk away from my underwater mortgage and let the bank have it.. I will have bad credits for years to come. Does bad credit report affect my prospect of finding a job or renting an apartment? This nagging question makes it difficult for me to walk away. Please advise.

Philip Brewer's picture

It depends too much on unknown factors for anyone to venture a guess. If you were looking for a job at a financial firm, it might matter a lot.

Beyond that, it really depends on individual bosses. Most will be well aware of the financial meltdown and will make allowances. Some won't.

Sorry I can't be more help.

Guest's picture
Guest

kelja,
first of all, not everyone that has to "bailout" bought a house that they can't afford! For many, other circumstances have come into play. Being that the economy sucks, people have lost their jobs, taken paycuts, been furloughed ect. So before you so quickly condemn them for bailing out, learn the facts.

Guest's picture
V Michigan

I just want to refinance. Thats it. Never late, 850+ credit score and nobody will refinance. Thats the problem. F the banks. I owe $86,000 house appr $72,000. Obama has done nothing for the country. Really I want to lower my rate and go to a 15 year and I am a risk, BS!

Guest's picture
BRUCE

My family and I are dealing with this issue currently. We purchased our home in NC in 2006 and currently owe $360k, yet the home is now worth far less than that. We have great credit, have never been late with a payment and can still make the monthly payments. However we have a great opportunity to relocate to FL for a great job, but dont see how we can do so simply because we are anchored to NC due to our mortgage. We dont want to do the unethical move of 'Buy and Bail', but it would be great if the mortgage industry had some sort of program that would allow good customers to find a way to work these types of issues out...for the gain of everyone involved.

Frustrated...

Guest's picture
Guest

If you are about to lose your income or insurance because of a disability or illnes you may want to consider the facts below before you walk away from your home, espesially if you may need medicaid or food stamp assistance, before the morgage company forecloses on it, espesially if you can't afford to file bankruptcy on the property.
1. The morgage company doesn't have to foreclose on the property, this means you have may end up with too many assets in your name if your paying rent and own a home too get medicaid or food stamps.
2. The need for life sustaining medication doesn't relieve you of the laws and rules of medicaid or the food stamp program, you are on your own.
3. Community clinics only help if you qualify and then their help is very limited and will not help you with a disablity case because most Community Clinic's can't afford to pay the high priced tests most people need for a disability case.
Please, please, please consider these things before you walk away and find you can't get the help you need.

Guest's picture
Guest

What do we do when my husband has been offered a fabulous new job out of country and we can't move because we are under water on our condo? We cannot rent it out like you mentioned because of the HOA rules in our complex. We are currently on a waiting list because they only allow a certain percentage to be rented. We cannot stay in our condo any longer because we want to have kids and we own a very small one bedroom. So we don't have the option of just living here forever like you mentioned. We also cannot just walk away because we have two loans and we read that the second can sue us. Even though we live in Oregon and we could walk away from the first.

Is there some hardship clause or can we declare bankruptcy if we move for the job and have to pay rent somewhere else and cannot afford to pay our mortgage anymore? We have to get out of this tiny place because we cannot have a family here. My husband hates his job and is getting offers out of state and out of the country. Should we just leave and try bankruptcy? What can we do?

Guest's picture
Guest

You guys do not know what you are talking about...for one thing people at one time could afford their house but then lost their jobs or got ill or went into a loan mod trial and didnt quilify and the bank escrowed their taxes 2 1/2 year to make it impossibe to pay their moprtgage. There are lots of reasons why but not because of what you guys think. STOP judgeing people because no one is immune to this and you can find your selves in this situation one day. Be fair and wish thses people well because the banks are making out like a bandit!!

Guest's picture
Guest

We all bought into what we thought was an investment. i.e., The American Dream. The Home has historically been the pot of gold we could put our hands into when the time came.

Buy a Home, then re-fi. Use the money for vacation, home improvements, college tuition....whatever you want. That's how the ads were marketed.

But now, theirs no equity in the homes. No equity=No money to loan. And for those that live in older homes, there's no cash to pull out to pay for electrical, plumming or structual rennovations.

Something beats Nothing! And this whole mortage industry needs to start HELPING AMERICANS. This economic war that's going on in America will benefit NO ONE.

The wealthy have become so disconnected, they don't realize their need for middle income Americans. DAAAH-HOW DO THEY THINK THEY GOT WEALTHY?

They need middle income Americans to serve them. I bet ALL The wealthy have servants. So when we loose our homes, can we come live with you?

Thanks for listening.
Bonnie

Guest's picture
Guest

The federal government is pushing several different plans to adjust the terms on mortgages to make them affordable. One that I've read about involves moving the rate down to market rates and then adjusting the balance down to no more than 85% of the house's current value. That might make the house affordable to keep. It might just make it affordable to sell.

WHERE CAN I FOUND OUT MORE INFORMATION ON THE PROGRAM MENTIONED IN STEP 4

Guest's picture
Cindy

My husband and I bought 11 years ago and can still afford our house. But I'm feeling it's a lousy investment and waste of money when the comps in the area are selling for 80 to 100,000.00 less. We would like to sell in a few years to by another house and we have wasted alot of money paying a high mortgage on a house that doesn't have value. Its a bunch of bull

Guest's picture
Julia

There is one other way that is a viable option for those in a jumbo loan. We can take get you back in a 75% loan to current market value giving you 25% equity, a lower monthly payment, more money in your pocket, the bank won't come back for the difference and no dings on your credit and you keep the wonderful home that you were so excited to buy in the first place. It's a win win for everyone involved.