What Are Your Options if Your Home Is Underwater?
When referring to a home as being “underwater,” it’s easy to think that it means the home is literally underwater. Fortunately, there is no actual water despite the name. However, an underwater home is something that all homeowners hope to avoid. When a home is underwater, it means the home’s value has dropped below the amount that the owner currently owes on their mortgage. For example, if a buyer owes $250,000 on their home and a year later the estimated drops to $220,000, that home is now considered to be underwater. When this happens, it can be a scary time for the homeowner, but there are options homeowners have in order to deal with this. Here are some of the routes a homeowner can take if their home ever goes underwater.
Keep the Home to Build Equity
The most advantageous option homeowners have is to stay in their home. This can be tricky, especially if the homeowner has lost their job and no longer has stable income. However, if the homeowner has the means to stay in their home and continue paying their mortgage, it can be a good course of action. When the housing market dips and causes homes to reduce in value, it’s typically always temporary and the values will go back up eventually. If the homeowner can wait it out, their home can regain all or most of its value.
Refinance the Mortgage
Many homeowners will immediately think of refinancing their mortgage to make it reflect the home’s new value, but this may not be feasible for some homeowners. Lenders typically won’t refinance a loan unless at least 20% of the original value has already been paid back. If the homeowner meets this requirement, they can approach their lender to discuss refinancing their loan.
Pay the Loan By Selling
If the homeowner can’t stay in their home due to being unable to pay their mortgage and doesn’t have 20% equity built, one solution they might want to consider is selling the home in order to pay off the remainder of the loan. Selling can help the homeowner gain most of the money they need to pay off the loan. It’s important to remember that when selling, some of the money earned will go to the agents involved in the sale—typically 6%, 3% for each agent. Selling a home isn’t the most ideal solution to an underwater loan, but it can be a good way to get out of the home if the homeowner knows they cannot stay there.
Sell the Home in a Short Sale
The final option is the one that homeowners typically want to avoid: selling the home in a short sale. If the homeowner can’t pay their mortgage and they don’t have the money to pay back the loan even after selling the home, a short sale is the next available option. In order to use a short sale, the homeowner and the lender need to come to a mutual agreement allowing the homeowner to sell their home for less than what is still owed on it. Lenders typically try to avoid short sales because they lose money on them, so the homeowner will need to have documentation showing that they cannot afford their mortgage.
Having an underwater home can be a tough time for homeowners, especially if they’ve lost their stable income. These options can help homeowners make the most of or get out of their underwater home so they don’t have to face foreclosure.