Upside Down on Your Home? – Here’s Your Playbook

In my home state of Minnesota, Minneapolis and Saint Paul have nearly 39 percent of homeowners under water. I’ve had the question, “I’m upside down on my home, what are my options?” so many times that I wanted to prepare a menu of options for people to reference. This article briefly outlines 9 potential solutions that may serve you well. The target audience here is not necessarily someone who’s in default on their loan but simply one who owes more than the home is worth.

All too often, when one is upside down on their home and/or struggling with their mortgage, they reach out for one to three options that they may have heard about on the news or from a friend. What homeowners should be doing is seeking the advice of qualified real estate agents, real estate attorneys and a skilled loan officer. But, . . . before a homeowner picks up the phone, there’s a lot of homework to do! Before one calls the professionals, they’ll just be spinning their wheels until the following items are ready:

  1. Know your address. You may know it to be one thing but for these purposes, your address is whatever http://www.usps.gov/ tells you it is. So go to this website, click on “find a zip code” and type your address. The postal service will then give you the address it has registered for you. This is the address that Fannie Mae and Freddie Mac use so it would serve you well to do the same.
  2. Collect your financial documents. Whether you’re working with a loan officer on a loan, a Realtor on a short sale or an attorney on a bankruptcy or modification, they’ll all need a complete set of your financials. This includes 09 and 08 tax returns, W2’s and 1099’s. If you’re self employed, you’ll need 2009 and 2008 tax returns from your business. If you haven’t filed your 09’s, get it done. You’ll also need copies of your most recent paystub, most recent bank statement, most recent statement on any retirement accounts, and a copy of a mortgage statement on each mortgage you have. Getting these documents scanned to image documents such as Adobe Reader can really speed things up.
  3. Collect your legal documents. It would be wise to, at the very least, have a copy of your mortgage note. If you are planning on meeting with an attorney, it would be much better to have your entire closing package. This should have been provided to you by the title company that closed your loan. Again, getting these documents scanned to image documents such as Adobe Reader can really speed things up.
  4. This isn’t necessary, but it’s wise. Get a copy of your credit report at http://www.annualcreditreport.com/ (this site is truly free and not a scam). Knowing the content of your credit will help you write letters of explanation if you’re doing a mortgage loan or a hardship letter if you’re doing a short sale.

Getting this done is arduous but it will prove invaluable to those you ask for help. Now you’re ready for that menu of options:

  1. Fannie Mae DU Refi Plus – If your loan is owned by Fannie Mae, you may be entitled to refinance up to 125% of your home’s value. You can get a loose idea of what your home is worth at http://www.zillow.com. To see if your home is owned by Fannie Mae, go to http://loanlookup.fanniemae.com/loanlookup/ and enter your address as it appeared at http://www.usps.gov/. If it is owned by Fannie Mae and you owe less than 125% of the value of your home, you may be eligible for this loan. The rates are slightly higher than normal advertised rates because of pricing add ons but they are close enough to market rates to be a heck of a deal.
  2. LP Open Access – If your loan is owned by Fannie Mae, you may be entitled to refinance up to 125% of your home’s value. You can get a loose idea of what your home is worth at http://www.zillow.com. To see if your home is owned by Freddie Mac, go to https://ww3.freddiemac.com/corporate/ and enter your address as it appeared at http://www.usps.gov/. If it is owned by Freddie Mac and you owe less than 125% of the value of your home, you may be eligible for this loan. The rates are slightly higher than normal advertised rates because of pricing add ons but they are close enough to market rates. This program will not let you finance more than 5 thousand dollars in closing costs and prepaids so if your settlement charges exceed 5 thousand, be prepared to bring cash to closing.
  3. FHA 115% Write Down Refi – This one doesn’t have a name yet so I just made that up. It’s a complicated program and I’m not sure how successful it will be. Essentially, if you’re refinancing a non-FHA loan, you’d take a loan out at 97.75% of your home’s value. A balance may be subordinated to the first mortgage thus becoming a 2nd mortgage but that loan may not exceed 115% of the homes value. For any of this to happen, the existing lender/s must write down their loan balances by at least 10%. Here is the announcement for this program. You must be current on your mortgage to qualify for this loan. A history of late payments will likely disqualify you for this loan.
  4. FHA Short Refi – This one is a little simpler. Essentially, you get preapproved for a 97.75% loan to value FHA refinance. This loan will support a certain amount to be paid to your existing lender. Whatever the loan can’t support, assuming you can’t come up with the difference in cash, will have to be written off by your existing lender. You’d be surprised how many lenders are willing to do this (I know I have been). This was officially permitted by HUD in December of 2009. You must be current on your mortgage to qualify for this loan. A history of late payments will likely disqualify you for this loan.
  5. Modification – You do not necessarily have to be in default to get a loan modification. If you’ve had any kind of hardship (i.e. involuntary reductions of income or unavoidable increase in expenses that indicates that you might go into default and you feel that you owe so much on your home and at such poor terms that you’re losing your incentive to repay, that might be enough to qualify. Many people have their own opinions on this and I don’t assume that mine is the best but I don’t recommend contacting your lender directly as a starting point for a modification and I don’t recommend calling a pay for hire service either. I recommend calling 1-888-995-HOPE (4673) to speak with a HUD approved counselor for free. They will conduct an interview and serve as an initial intermediary between you and your lender.
  6. Chapter 11 Bankruptcy – It’s expensive, it’s a long and hard process but unlike Chapter 7 and Chapter 13, a judge can order a mortgage modification under a Chapter 11 bankruptcy plan. It is the most flexible type of bankruptcy and is thus difficult to explain. Consult an attorney with specific Chapter 11 experience.
  7. Deed in Lieu – This is where the owner of a property deeds the property back to the lender to avoid foreclosure. Obviously, this only makes sense if you want to get out of the situation quickly and don’t want the house anymore. I highly recommend the assistance of an attorney in this to ensure that the act of deeding in lieu serves as payment in full of your mortgage to prevent both damage to your credit and the potential of deficiency judgments.
  8. Short Sale – A short sale is where a homeowner and lender cooperate to sell a home in a situation where more is owed on the home that the house is worth. The buyer and their Realtor prepare the home for sale and market it and in exchange, the lender writes down the balance of their note to facilitate the sale. It is less costly that foreclosure so lenders are typically willing to do this. Often times, with the help of a good Realtor, damage to your credit can be ameliorated. When choosing your agent, make sure they have a lot of past experience with short sales, are aware of what is changing in short sales and, preferably, they have done short sales that involve your current lender.
  9. Foreclosure – Now I hesitate to even mention this but a fact is a fact. Foreclosure is an option. If you’re upside down and you can’t make your payments, sometimes you just have to let go. Too many people think the sheriff’s sale is the end. It’s just a step in the process. Although it varies by state, foreclosure is usually a 9 month process. So, 9 months of living there and then you move out. It’s an ugly option. . . but it’s an option.

When we are under stress, we often reach for the first or easiest option that might get us away from the cause of that stress. In the case of the underwater homeowner, that can be a huge mistake. Few know how many options they really have and, if these options are weighed carefully, they can learn that with some effort on their part and the help of qualified professionals, they can get away from their problem with a good solution in hand.

Please remember that all four of these loan types are very difficult and consequently, you’ll need an excellent loan officer. Managing your legal risk in a deed in lieu situation or conducting a Chapter 11 requires a seasoned and sophisticated attorney. Proper execution of a short sale is both a science and an art so, if that’s the route you take don’t make a quick decision on a Realtor. Just because they advertise as a short sale expert doesn’t make it so. Choose your professionals wisely, be deliberate in choosing the solution that you want and be organized and you’ll find that you’re closer to being stress free again than you think.

My heart goes out to you for your situation and, . . . if misery loves company, . . I’m right there with you!

Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI – NMLS ID# 79048

031311_0111_mortgagesfo2

The ONLY civilized way to search for homes!

The Home Buyers Scouting Report® is provided directly to the buyer by HBM II, a licensed national real estate brokerage service company, not to or through a lender. The FREE home finding service is provided directly to prospective homebuyers by HBM II and its real estate brokers, as part of their ordinary real estate brokerage services. HBM II, Inc. works cooperatively with other real estate agents across the United States in attempting to find ready, willing and able buyers for homes listed for sale. The role of the Preferred Loan Officer is to assist in determining a comfortable home price range for Home Buyers Marketing II, Inc. (HBM II) to use when it is searching for property listings within the buyer’s search criteria.

.

Comments 3

  1. Brooke

    Sorry—major typo–I didn’t mean 18% (realtors fees, closing costs). I meant 4-7% which translates to about $26,000-$46,690.
    Not sure where my 18 number came from.

  2. Brooke

    Hi Charles,
    First of all, I have to say that I love this site. I am surprised at how much information is on it and find myself reading posts that have nothing to do with my situation even.

    We have moved out of CA for a job in TN (still have our house there). We are current on our mortgage and our renters want to buy. We can probably get what we owe out of it—but that does not take into consideration closing costs & realtor fees. Although we would not be listing it–the realtor still wants $13,000 just to do paperwork.

    At the same time, we have another issue going on. We made a mistake 2 years ago on our taxes. During an unexpected layoff with no severance pay after 13 years with the company, my husband panicked and cashed in some of his 401K. He got a job about 3 months later, and that amount he cashed in had unexpectedly bumped us into the higher tax bracket. Long story short, we got hit with a huge tax bill ($36,000). It was in an “investigation” mode for the past 2 years and now we will have to start making payments on it. A tax attorney suggested to us that we file Chapter 13 in order to freeze the interest and get it paid off (along with debt we incurred from a shady contractor). He also suggested that we put the house in Chapter 13 as well and let the bank deal with it (if it was to be a short-sale anyway). He seems to think it would be a short sale, citing that closing costs, realtor fees, etc. would be about 18%–and if the sale price is the same as our pay-off, it would have to be a short-sale (even though we have the buyers). He says it will be better for us credit-wise to do the Chapter 13 on it as opposed to a short-sale (that we can start to rebuild our credit sooner than with a short-sale which takes some time to complete). I know there can also be tax implications with a short sale as well. Your thoughts on Chapter 13 vs. a short sale for a home that is not quite under but at the water line? We know there is a waiting period with bankruptcy, but will want to buy ASAP since in our new location the rents are twice and 3x what a mortgage would be. Chapter 13 is looking unavoidable—so is it better to do a short sale AND a chap 13…or just do it all under the chap 13? Thank you in advance.

    1. Post
      Author