An upside down mortgage is where an owner of a house owes more on the house than what the house is worth and is in negative equity. For example, if an owner owes $200,000 on a house, but the house value if worth only $180,000 than the owner has an upside down mortgage.
Since the house is worth less than what you owe on your mortgage and you are in negative equity, you cannot sell your house without getting permission from the lender of the mortgage. It is important to talk to your lender to see if the option is available. Some lenders consider homeowners to sell the house even if they owe more on the mortgage than the amount the house is worth and they would wipe out the remaining balance of the loan.
You can also do a short sale and ask the lender or bank to sell the house for less than the balance due on the mortgage. Sometimes the lender will settle for the sale price and wipe out the debt.
Some causes of having an upside down mortgage may include:
- Overall financial mismanagement (i.e., overspending, unnecessary debt)
- Market values have decreased as a whole in a particular area
- Poor planning when selecting a mortgage payment plan
- Poor negotiation during the home purchase and sale stages
- Mortgage fraud or fraud during the real estate sales transaction
Another factor that contributes to upside-down mortgage situations is the involvement with subprime mortgages. With subprime mortgages, payments on the principal are significantly lower than for other loan arrangements. If the value of the home has gone down, the borrower has paid little toward the principal, which can cause difficulties if they try to sell the home.
If you are in an upside down mortgage where you owe more than your house is worth, here are some options or solutions:
- Stay Put: Some experts advise that a person attempt to stay in their mortgage situation if they have an upside-down mortgage. Selling the home can result not only in lost profits, but can also damage the person’s credit.
- Negotiate with Lender: Attempt to renegotiate with the mortgage lender and see if they can obtain a different plan that can help alleviate some of the burden of being “underwater”. Loan modifications can make the payments affordable and you can wait until the housing market gets better.
- Rent Out the House: Try to rent it out to cover the cost of the expenses and move into a less expensive place so you can afford the payments all together.
- Short Sale: Ask the lender or bank to sell the house for less than the balance due on the mortgage. Sometimes the lender will settle for the sale price and wipe out the debt.
- Foreclosure: Let the bank foreclose on the property and sell the house to pay the balance of the loan.
The Federal Housing Administration has three programs that helps people dealing with an upside down mortgage: the Home Affordable Refinance Program (HARP), the Principal Reduction Alternative (PRA) and the Treasury/FHA Second Lien Program (FHA2LP). These three programs are available to existing FHA loan borrowers and are facing upside down mortgages.
To qualify for these programs you must be current on payments and experience a significant reduction in the value of your home compared to how much you owe on your mortgage balance. The HARP is committed to refinance the homeowner’s loan into a stable loan option and work with the bank and lenders to reduce the principal balance of the loan.
Hiring a lawyer may be necessary in order to obtain guidance with regards to upside down mortgages. A local mortgage attorney will be able to provide you with legal advice according to the specific real estate laws that are effective in your state. Your attorney can provide you with expert legal representation in the even that you need to file a lawsuit over upside down mortgage issues.