Learning how to Deal with your “Up Side Down” Mortgage

The brunt of the economic crisis particularly on the real estate industry is now really falling on most homeowners who have mortgages turned upside down. The shrinking market value of properties is indeed resulting into a negative equity for the hapless homeowners who are on mortgages. This has cause so much distress, panic, nervousness and emotional upset for most of them. Until such time that the market can regain its lost footage, no quick solution is in sight for these people. If you are upside down on your mortgage and are in a position where you need to move -- whether it is because of a job transfer or an unexpected layoff -- the most ideal option is to keep your home until you are no longer upside down. This can be achieved by saving money to match your negative equity or waiting for the market to pick up. Three alternatives are suggested below in the order of from best to worst in relation to your overall financial and emotional well-being.

Option 1: Borrowing the money

You can resort to this option as long as you are slightly upside down and not really upside down. If your negative equity is still in a manageable level, you are not in such a tough place. By borrowing money to get out of the pinch, you are protecting your credit score and ensuring that you will be able to get another loan sometime in your lifetime. The best place to get such a loan would be from a friend or family member. If you do not have relatives to take a loan from, there are other places to look. You can turn to the federal government. If you, your child, or your spouse is enrolled in college, you may be eligible to take out an additional student loan. The federal government will allow students and parents to borrow money in excess of actual tuition and fees to cover living expenses. It would not be uncommon for students and parents to be able to borrow an extra $7,000 or $8,000 per semester which is available in cash. These loans have a relatively low interest rate (between 6% and 8%), are repayable over a long period of time, and their interest is generally tax deductible.

Option 2: Negotiating a short sale

Short selling is when you negotiate with the mortgage lender to accept a fair market price for the home instead of the amount that you actually owe. This is more likely to be accepted when home values in a certain area have dropped significantly. Though mortgage lenders are not required to modify your agreement and accept less than you owe, they may be willing to because it may prevent a foreclosure, which is very expensive for a bank. Short selling is similar to foreclosing, but it will ultimately cost the bank less money and permit you to buy another home a bit sooner. It is preferable to a foreclosure, but is only offered by some lenders to some borrowers, depending on the circumstances. Short-selling on your home will cause as much immediate detriment to your credit score as a foreclosure.


Option 3: Foreclosure

Obviously this is the worst thing for everyone. Your credit score will be ruined and its effects will be long lasting. You will probably be unable to receive any other type of loan for a few years. Being upside down on a house is a risky situation -- especially for those that need to move. If you are upside down on the mortgage for your current residence, save as much as you can so you can eventually get rid of the negative equity. If you need to move, do whatever you can to keep the home until house values go back up. If you cannot keep the home, try to borrow money from a friend or from the Department of Education. Remember that it is better to put an extra five or ten thousand dollars on a credit card than go through a short sale or foreclosure. If you are unable to get hold of the cash to get out of the red, try to negotiate a short sale. It's effects on your credit are detrimental, but not as long-lasting as a foreclosure. If your lender is unwilling to engage in a short sale, then foreclosure may be your only option.




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