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What to do with your “underwater” mortgage

October 14, 2011

As I mentioned in yesterday’s post, there are currently over 10 million “underwater” mortgages, where the value of the home is less than the mortgage owed.  If you live in central Florida, there’s a good chance you might be in this situation.

I also depressed you with statistics supporting a slow turn around in the market – probably 4-6 years away.  Certainly not ideal economic times, but this too shall pass. At createmargin, I don’t want to see you make a short-sighted decision that you’ll regret well into the future.  So find your category below, and don’t freak out – it’s going to be okay…I promise.

“Underwater” and CAN’T afford your mortgage

Let me start by saying there’s a big difference between “can’t afford” and “don’t want to pay.”  Be sure you are in the “can’t” category.  If it’s impossible for you to generate enough income and cut enough expenses to make your mortgage payment, then you need to

  1. Hound your bank about every government program, mortgage modification/forgiveness at your disposal.  Be ruthless.  You should be on a first name basis with the guy in India fielding their calls.
  2. Consult a qualified and trusted real estate agent or attorney about a short-sale.  This is where the bank agrees to you selling the home for an amount less than your mortgage balance.  Every state has different rules and every bank has different policies, so it’s important to get ALL the information you can upfront.  You could still be liable for the difference, and might still owe income taxes on the difference.  You want to be protected, so find someone who has experience.
  3. I know there are cases where foreclosure will be unavoidable, just try to let foreclosure choose you, not vice versa.  Your credit will pay dearly – do what you can to exhaust the short-sale option.

“Underwater” and CAN afford your mortgage

Take a deep breath.  Count to 10…slowly.  And say “don’t worry, be happy.”  This really isn’t a big deal.  Real estate prices WILL RECOVER.  Just like any investment, real estate will have its ups and downs, but its a great long-term investment!  Why?  There’s a limited supply of land, and population growth means demand (long term) will continue to rise.  That’s a recipe for increased values.

So yes, while it might be frustrating to see your monthly mortgage statement, or homes selling for 50% of what you purchased for, eventually values will begin to rise.  And if you continue paying your mortgage, your balance will continue to go down.  That combination means before you know it, you’ll be “above water.”.  Right now, your loss is just on paper.  Stay the course and you’ll be fine.  If you’ve signed a contract and you can pay, then pay.  Let God handle the stuff you can’t control.  Really, it’s gonna be okay.

Looking to buy a home

If you’re in the market for a home, God bless you.  This is definitely a buyer’s market, and it will continue to be a buyer’s market for the next few years.  So my advice to you is this:

  1. Be patient.  Be picky.  Don’t buy the first, second, or even fifth property you see.  Take your time.  Find the perfect house for your situation and your income.  Be willing to wait on the long process that comes with purchasing a short-sale or foreclosure.  You make a wise purchase now, you could be in a great financial position early in your life.
  2. Save at least 10% (20% is my personal recommendation) for a down payment.  The reason many people are in the above categories is because they didn’t make a substantial down payment.  Remember, prices will remain low for a long time.  You’re not going to miss out on a great deal if you don’t pull the trigger right now.  If you can’t afford to buy now, then save for the next two or three years, and buy then.

Regardless of your category, I’m praying for you.  I hope we’re all able to keep things in perspective, and remember we have it pretty good in the U.S. of A.

One Comment leave one →
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