What to Do If You Owe More Than Your House Is Worth?

A family stands in front of their newly-bought house
Image Credit: Martin Barraud/OJO Images/Getty Images

Like thousands of others, you bought your dream home in a dream neighborhood thinking that you finally achieved your goals. However, something went wrong. Homes began foreclosing around you, the housing market crashed, and you were left owing more on your house than it is worth. Refinancing in a tight lending market is not an option, so you are left sitting on an investment that has gone bad and a dream that has turned into a nightmare. You do have options that could help your situation.

Understand Your Market

If you owe more on your mortgage than what the home is currently worth, the first step is to understand your own housing market. Look for foreclosures in your neighborhood. Analyze how much others have sold their homes for in your region. Assess your own situation. Ask yourself if you can afford your monthly payments and determine how long you plan on staying in your home. If you hope to stay for a long time, you can probably afford to wait. Market conditions change, as will the value of your home. If you plan to sell soon, are behind on your payments or think you will not be able to meet future payments, you will need to take immediate action. HUD -- the U.S. Department of Housing and Urban Development -- offers free or low-cost advice at counseling agencies for those facing foreclosure and other housing problems.

Options with Your Current Loan

If a change is necessary, start with your current loan. Each homeowner's situation is unique, but, even if you are behind in your mortgage payments, you do have options under your current loan. Consider asking for a repayment plan. These plans usually require the homeowner to pay back the delinquent amount within 10 months, adding a portion of the delinquent sum to your normal monthly payment. Under this plan, your account will become up-to-date and your loan will be secure. However, repayment plans can only go so far. If you are looking for a more dramatic change, consider a loan modification. While the loan modification will not change what you owe, you can change the terms of your loan. Consider a loan modification as a fresh start with a better interest rate and lower payments. If you have an FHA loan, the government also has several options for you to consider with a goal of getting you into a mortgage that is affordable.

Short Selling

If your situation is just not workable and you want to get out of your home now, an option is a short sale. In a short sale, the seller asks the lender to accept less than the full amount that is owed on the mortgage. You should discuss this option with a lender if you think you can find a buyer, but the sale will still be less than the value of the mortgage.

Offer a Deed

A rather drastic option is to ask your lender to accept a deed rather than foreclosing on your home. If the lender accepts your deed, you transfer ownership of the house to the lender. You avoid foreclosure but you get nothing for the house. You are out of your mortgage, but you are homeless and have forfeited any return on your investment. Like a short sale, a deed offer is a last-ditch effort.

The best advice, though, is to remain calm, determine whether it is viable to stay in your house and work things out with your lender. Most lenders, when faced with a homeowner who wants to foreclose, short sell or otherwise opt out of the loan will be open to loan adjustments if the situation is dire enough.

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