Avoid foreclosure altogether

How To Get Out Of Your Underwater Mortgage Without Hurting Your Credit

Remember the housing crisis back in 2008? During those turbulent times, around 10 million homeowners owed more than what their house was worth. Nevada was hit especially hard, and as a result, 65% of homes were underwater by the end of 2009.

The housing crisis hit everyone; from multimillion-dollar McMansions to the humble <1,000 sqft abode. It wasn’t until March of 2009 that the U.S. Government introduced HARP, a program designed to help homeowners refinance out of their mortgage.

Over a decade has passed, and yet, many people find themselves in similar situations. More importantly, being the proud owner of an underwater mortgage can feel overwhelming. You’re not sure how you ended up in that position or what you can do to get out. You do, however, know one thing; you want to find a way out that doesn’t hurt you in the process.

If your mortgage is underwater and you’re looking for a solution, the following strategies can get you out without damaging your credit:

  • Refinance out of the mortgage
  • Sell the house through a subject to
  • Sell through a loan assumption

Is your mortgage truly underwater?

A mortgage is considered underwater if the debt surpasses the fair market value of the house. For instance, if you owe $100,000, but the fair market value is only $85,000, then your mortgage is underwater by $15,000.

Admittedly, calculating how “underwater” you are is simple when compared to appraising your house. Believe it or not, many homeowners believe their house to be worth much more than it actually is.

To accurately determine if your mortgage is underwater, you need to know exactly how much you owe. Additionally, having an accurate market value will make life ten times easier for you, and your buyer.

Figure out how much you owe on the mortgage

Figuring out exactly how much you owe will take around ten minutes. You want to get hold of your lender’s mortgage or existing loans department and ask them. Yes, it’s that simple. You will, however, need the borrower’s full name, address, loan/account number, and the last four SSN.

What is the fair market value of your house?

Depending on where you live, finding out your property’s value can be hit or miss. In either case, starting your search with Zillow’s Zestimate and Realtor.com’s estimator will give you a good idea of the range.

If you live in an active market such as Austin, TX, San Jose, CA, or Seattle, WA, relying on “home value estimators” will lead you down the wrong path. The price range for active areas changes so frequently that it often outpaces estimates done by websites.

To accurately determine the fair market value of your house, you can contact a real estate agent or appraisal specialist. Although they do cost money — according to Angie’s List, the average is between $300 – $400 — appraisals allow to run your numbers with an exact amount in mind.

Analyze your situation

Once you have solid numbers to work with and you’ve determined that the mortgage is underwater, your next step is to find a solution that’s right for you. To start off, do you want to get out of the underwater mortgage and keep the house? Or do you want to get out of the house altogether?

The answer to those questions will help you determine how to move forward. It’s very important to be realistic about your situation. For example, if you’re underwater by $25,000, you’d be better off by getting out of the house altogether.

On the other hand, if you’re only underwater by $10,000 or less, staying put and working through the situation is a good option. It all comes down to your problem and what you’re looking to get out of it.

Get out of the underwater mortgage and keep the house.

If you want to get out while keeping your house, there are a couple of viable options for you. Some incredibly obvious, such as staying put and working out a deal with your lender, while others can be a little bit tricky. Keep in mind, however, that most of these strategies hinge on the type of mortgage that was taken out.

Stay put

If your mortgage is underwater, the simplest solution is not to sell the house and keep up with the monthly payments. You will have no equity for a while, but, you will eventually get out of the situation without having to sell.

Speak with your lender

Mortgage lenders are not in the business of property management. For them, it’s in their best interest to prevent the loss of their investment (your mortgage) by negotiation a deal with you. Keep in mind that, according to the Home Buying Institute,

“ [in] a normal economy, refinancing an upside-down mortgage loan would be nearly impossible.” – Source

Refinance through a government program

As mentioned at the beginning of the post, the Home Affordable Refinance Program (HARP), was created back in 2009 to help homeowners refinance out of their underwater mortgage. After helping over 3 million homeowners find financial relief, HARP was finally put to rest in December of 2018.

Do not fret, however, as the program has been replaced by Fannie Mae’s High Loan-to-Value Option and Freddie Mac’s Enhanced Relief Refinance. Both programs offer very similar solutions with one significant change; in some instances, the loan-to-value requirement has been increased from 80% to above 95%.

Fannie Mae’s High Loan-to-Value Option

Fannies Mae’s new program will benefit you in at least one of the following ways: it will reduce your monthly payments, lower your current interest rate, shorten the amortization term, and if you have an adjustable-rate mortgage, it may change it to a fixed-rate one instead.

To qualify for the program, you must meet strict requirements which include, but are not limited to:

  • The Note Date of the mortgage in question must be on or after Oct. 1, 2017.
  • You must be current with your payments, i.e., no more than 1 missing payment in 12 months.
  • The mortgage has to be owned or backed by Fannie Mae.

Freddy Mac’s Enhanced Relief Refinance

This program is almost identical to that of Fanny Mae’s. The most significant difference is that your mortgage must be owned or backed by Freddy Mac instead of Fanny Mae. In either case, both of these programs serve the same purpose; to ease the burden of being underwater on your mortgage.

If you are unsure if your mortgage is owned or backed by either of those two programs Freddie Mac has a tool that can help you. Fannie May has a similar form that will, again, help you determine if you can qualify for government assistance. If you’re still unsure of who owns your mortgage, a quick call to your lender will let you know within minutes.

Key takeaway

Qualifying for government assistance is a long and arduous process. The average homeowner, if accepted, will start to see improvements at the 15-month mark. It’s a headache, but if you want to get out of an underwater mortgage and keep the house, this is your best option.

Get out of the situation altogether

If you determined that attempting to refinance is not going to work for you or it’s not in your best interest, getting out Scott-free should be your next goal. There are plenty of ways to get out of a mortgage, but only a few will get you out without hurting your credit in the process.

To get out of an underwater situation, you can sell the house through one of the following strategies:

  • Loan assumption
  • Subject to

Loan assumption: the buyer assumes your debt

By-the-book loan assumptions are simple, useful but extremely rare in today’s market. Assumptions allow the buyer to “assume” a mortgage along with its current terms. In other words, it would let you walk away debt-free and with no blemish on your credit report.

If you want to sell the house through a loan assumption, you will need the help of a real estate agent, or an attorney experienced in real estate transactions. Once you have their support, you want to find a buyer who is willing to assume an underwater mortgage. As you can imagine, this is where many people hit a brick wall.

What traditional buyer would assume a lousy mortgage? Typically, a buyer benefits from a lower interest rate and they gain instant equity in the process.  In this case, however, your buyer would get none of the benefits associated with assuming a loan. You get the benefit of walking away from the debt, while the buyer is stuck in that terrible situation.

If you find a buyer willing to assume your underwater mortgage, you must make sure that you are released from all liability. Failing to do so, could allow an avenue for the lender to come after you if the new owner defaults on the mortgage.

Subject to sale: a double-edged sword

Selling your house subject to is similar to a loan assumption with one significant difference; the debt stays under your name. Being held liable to the debt means that, if the buyer defaults, the damage will be done to you, not them.

Subject tos give the buyer a layer of protection that a typical loan assumption cannot provide. In short, the buyer does not assume the debt, they are only subject to it. By not assuming the debt, the buyer can take-on risky investments and help homeowners that would otherwise go unnoticed.

Benefits for the seller are similar to those of an assumption; you walk away from the mortgage, pay nothing out-of-pocket, and it does not affect your credit score. In a subject to sale, however, you get one more benefit — since the debt is still under your name, the monthly payments and eventual pay-off will be reflected in your credit, not the buyers.

Who buys houses subject to?

The answer is quite simple, the only buyers doing transactions subject to are real estate investors. No, not the “get rich quick” crowd, I’m talking about established businesses that have been buying and selling real estate for many years.

As you can imagine, trusting someone else to take over your mortgage payments without any of the liability is a hard pill to swallow. You need to work with a company familiar with your situation and how they can best help you. Contrary to popular belief, not all real estate investors are alike.

Unlike the majority of investors who only work with houses in poor condition or a ton of equity, a small percentage dedicate ourselves to helping homeowners out of complex situations. Working alongside sellers going through foreclosures, underwater mortgages, and even divorce is par for the course.

Of course, whether or not you decide to work with a real estate investor depends on your situation. In this case, however, your underwater mortgage leaves you with few alternatives. Whichever way you slice it, selling your house subject to is the best way to get out while protecting your credit.

In conclusion

Getting out of an underwater mortgage without doing more harm than good can be though. First things first, contact your lender and speak with them about your situation. If their solution works for you, by all means, go ahead.

On the other hand, if they’re not able to meet your needs, contacting a real estate investor for help is the best way to go. At the end of the day, as with most things, the final decision on how and when to move forward depends on you.


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