There has been a lot of talk about houses being “under water” over the last few years since the real estate market went bust. Today I want to talk about just what “under water” means, and what it means for you.
What Does “Under Water” Mean?
The term “under water” (synonymous with the term “upside down”) simply means that you owe more on your mortgage than the house is actually worth.
Unfortunately, for the millions of homeowners who are upside down on their home, they know all too well that it’s not nearly as fun as hanging upside down from the monkey bars on the playground.
So how did so many people end up owing more than their home is worth?
It’s very simple.
Too many people got excited about buying a home at the same time. As demand increased, prices went up. People were making a lot of money in real estate, so more people piled on and demand went up even more, causing prices to go up even more. This caused housing to cost much more than it would in a normal housing market.
So many people bought a house (whether they could afford it or not) that prices got too crazy and it all came crashing down because it was unsustainable over the long term.
Think “Beanie Babies” and you’ll get the picture.
What To Do If Your House is Underwater
So now that you understand how it happened, what can you do if your house is under water? Here are four things that can help you if you’re stuck owing more than the house is worth:
- Strategic Default- A “Strategic Default” means you default, or walk away from the mortgage and give the house back to the bank. Some people do this even if they can still afford the payment. This leaves the bank to sell the house to get whatever they can for it. But you’re not off the hook! You take a big hit on your credit score, and the bank will eventually hunt you down for the remainder of the money. In addition, the spiritual implications of not living up to your word is something you should consider as well.
- Short Sale- A “Short Sale” means you got approval from the bank to sell the house for less than you owe on it. Some banks are allowing people to do this if they are behind on the mortgage but not in foreclosure yet. A short sale allows you to avoid foreclosure and keeps the bank from having to take over the house, which is something they don’t want to do. However, it will hurt your credit score for years to come.
- Government Programs- HARP 2.0, FHA Streamlined Refinance, and the Mortgage Settlement. The government mortgage relief programs have been overhauled to include more people and make it easier to qualify. But remember, in dealing with the government it may be very time consuming and complicated to get approved for participation, but the hassle factor may be worth it if you can have your principle or your interest rate reduced substantially. You can find out more about it here.
- Sit Tight- If you plan on staying in your home for years to come and you can afford your mortgage payment, you can stay put and wait for the situation to reverse itself. As you pay down the mortgage you will gain equity and, over time, home prices will rise again. These two factors working together will eventually get your head above water, and probably sooner than you might think.
If you have found yourself in an underwater situation with you mortgage, the first thing you should do is take a deep breath and don’t panic.
Panic and desperation will always cause you to make bad decisions that can haunt you for years to come. Make sure to consider all your options and get wise counsel that will help you determine what the best course of action is.
By all means, don’t let someone convince you that just because your home is under water, you’re in a hopeless situation. Sometimes home prices go down in value. It will recover, and so will you.
Working your way through the process may not be easy, but it will be worth it once you’re done. Just remember to take the long view and realize that this too shall pass.
Question: Have you had any success dealing with a home that’s under water? Tell me about it in the comments.
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