debt

Stay in home if you're upside down on loan

Steve Bucciq_v2.gifDear Debt Adviser,
What information or advice can you give us in regards to an upside-down home loan?  We purchased our home in Fresno, Calif., just a few months before the beginning of the housing price burst in 2007 and put a 20 percent down payment on $600,000. Our home is now devalued to $400,000, and we are upside down by $60,000. Are there any programs or relief for these situations?
-- Norma

a_v2.gifDear Norma,
Knowing where you stand relative to the value of your home is very difficult these days.  Until prices stabilize or you actually sell your home, any assessment of value is to some extent a guess. That said, if you put 20 percent down on a $600,000 house, that's $120,000. With an estimated value of $400,000, you are $80,000 upside down, plus any commission due on a sale.

I hear daily from people who can't afford their mortgages and can't refinance because their home values have dropped, or they are unemployed. Although being upside down on your home loan is not a great situation, things for you are not as bad as they might be.

As long as you are able to stay put for the foreseeable future, or until your property appreciates 20 percent of its current value, being upside down should not matter. When I bought my first home a long time ago, the conventional wisdom was if you stayed in the home for two years, you would break even or maybe make a little on the resale. This still sounds like good advice today.

The time to worry about being upside down in your loan is when you anticipate having trouble making your payments and/or need to sell your home right away. For those of you in this situation, here are some things I want you to know.

There is help for those who are employed, whether or not you still have some home equity. Refinancing, which usually requires some equity in the home, and loan modification, when equity may not be necessary, are possible options but can be very complex. The main issue is to know who to talk to and what programs are available. 

My preferred way to tackle this problem is to call the Homeownership Preservation Foundation at 888-995-4673 (HOPE). The foundation's counselors are part of "HOPE NOW," an alliance between counseling agents, servicers, investors and other mortgage market participants approved by the U.S. Department of Housing and Urban Development, who provide free foreclosure prevention assistance. Because everyone has come together under the auspices of the government, lines of communication are already in place. Although they're not perfect, this can speed up getting to the decision makers. 

If you have no income or have been unable to refinance, the foundation's counselors will give you all your other options including short sale, deed in lieu of foreclosure and more.  These may not be the alternatives anyone wants, but they may be the least stressful, least damaging to your credit and least expensive for you in the end.

No one knows what new mortgage assistance programs may become available from Uncle Sam, but the foundation will know first, so I recommend them. Plus, they are free of charge and funded by the government.

If you are forced into a foreclosure or short sale, I want you read about the Mortgage Forgiveness Debt Relief Act or see IRS Publication 4681. This act keeps any losses that the bank suffers on your home from becoming taxable income to you. I know, the very concept of owing money to the IRS after the trauma and expense of a failed mortgage is insane but without this law, that's exactly what could be the case. The Act applies to mortgage debt forgiven on a qualified principal residence during calendar years 2007 through 2012 at which time it is scheduled to run out.   

So, Norma, if you are not having problems paying your mortgage and can stay in your home for the next several years, I'd recommend riding out the housing slump and thanking your lucky stars. If your situation changes and you find you can't make mortgage payments or if you need to sell while upside down, contact the Homeownership Preservation Foundation. Until 2012, the Mortgage Forgiveness Debt Relief Act will still be in effect.

Good luck!

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