If you have a house underwater in the literal sense because your basement is flooded, we sincerely apologize as this article won’t tell you what to do. We do wish you all the best, however! In this article, we’ll be talking about what it means when you have a house underwater and what some options are when you want to sell or cannot afford the payments any longer.
The Definition Of A House Underwater
If you owe more than what the fair market value of your home is, then your house is “underwater” by definition. After the 2008 housing crisis, many people found themselves in this exact situation with a house underwater. They bought their home prior to the market collapsing and then they owed more on the home than what they could sell it for.
This poses a problem as you will not be able to sell your home if it is under water unless you plan to write a check at settlement to cover the deficit. For instance, if you owe $150,000 on your home and someone offers you $120,000, then you will have to bring $30,000+ to settlement in order for the sale to go through.
Potential Solutions When You Have A House Underwater
No matter what the cause is for having a house underwater, there are potential solutions. We’ll go over these solutions in the order that we recommend doing them. The goal is to try the best-case options first, before getting to the worst-case scenario. Without further ado, here is the list.
1. Reach Out To The Loan Servicer
The loan servicer is the entity who is collecting the mortgage payments from you. On your mortgage statement, the name of the company will be listed, along with ways to contact them. We recommend being honest with them and letting them know what your unique situation is.
Especially in the post Covid-19 world, there is flexibility with these companies and it is not a rare request for them to get. They will hopefully be able to work with you and do some form of loan modification or restructuring of the debt so that you can either continue making the payments or be able to sell the home.
Lenders DO NOT Want Your Property
Loan servicers and lenders are in the business of lending, they are not in the real estate business and they absolutely do not want to be. They will usually avoid foreclosing on someone’s home at all costs unless it is absolutely necessary.
For these reasons, they should be willing to work with you and find a solution that works for both parties. If this is not the case, there are ways to get a loan modification. Be very cautious however, as there are lots of predators looking to scam people and profit off of a bad situation.
Consider Reaching Out To A HUD-Approved Counseling Agency
Contacting your loan servicer directly is always the best route. If that doesn’t work, then you may look for a trusted attorney to assist, or go through a HUD (Housing and Urban Development) approved counseling agency. Here is the link to get more info on this.
2. Obtain A Personal Loan
This may seem like a humbling thing to do, but it could also be the easiest solution here. If someone in a position to do so, can lend you whatever you need to get caught up on payments, this can be very beneficial. It will allow you to either sell the home and move on with your life, or prevent the home from being foreclosed upon by the lender.
Figure out a timeline for how you will repay them and then present the idea to them. Having a house underwater where you are unable to sell is usually no one’s fault, so there should be grace and understanding from whomever you are asking.
3. Rent Out The Home And Move In With Someone
Doing this will allow you to collect rental income which will offset the mortgage payment. This can be done in the meantime while you continue paying down the loan balance. At the same time, the value of the home will hopefully be rising.
After doing this for a year or two, you may be able to sell the home because the loan balance is now lower, and the home value is now higher. You may even be able to save some money during this period if the rent can significantly offset the mortgage payment.
Options 2 and 3 can even be used in combination with each other. If someone loans you money, you should be able to pay it back quicker if you are renting the house out.
4. Work With Some Experienced Investors To “Get Creative”
real estate investors can be very creative and are very experienced in structuring win-win agreements. This is what they do for a living. Working with one or a few that know what they are doing can be very beneficial.
Talk through your situation with a trusted investor and assess what they can potentially do. They might have a trick up their sleeve and a way for you to “creatively” sell your home. If they don’t have a solution to offer personally, they might be able to get you in touch with someone who does.
Real estate investors typically hang out with other real estate investors so there is likely someone within their network who can assist. Sign up for HappyHome or simply reach out to us and we can get you connected with someone who will hopefully be able to help!
5. Consider Doing A Short Sale When You Have A House Underwater
We’ve now arrived at the worst-case options. If all options above have been tried to no avail, then this might be the best remaining option. A short sale is when the lender allows you to sell the home for less than what the loan balance is.
The process involves working with a real estate agent, preferably one that is experienced with short sales, and submitting an offer to the lender. If the lender approves, then you will be able to go forward with the sale.
A Short Sale’s Effect On Your Credit
A short sale will damage your credit, however it is not nearly as bad as doing a foreclosure. Short sales generally impact your ability to obtain a mortgage for 2-4 years and the credit score will be greatly impacted as well.
But, because you helped the lender out by trying to sell it, it is not looked at as poorly as a foreclosure would be, where you simply walk away from the property. Keep in mind that you may be required to pay taxes on the difference between what you owed and what you sold the home for.
In the same scenario as earlier in this article, if you owe $150,000 on your home but do a short sale for a price of $120,000 the difference would be $30,000. The lender is able to write this off as a loss by “forgiving” this amount and issuing a tax form to you. This amount is usually treated as income and you will have to pay taxes on it. Check with a CPA or tax expert who can advise on this situation.
This is the absolute worst-case option and should be avoided at all costs. Be sure to check out this article that talks about what you can do when facing foreclosure, and what the process looks like. Also, keep in mind that doing a foreclosure will essentially disqualify you from getting a mortgage for at least 4-7 years.
A foreclosure is where you simply walk away from the home and let the lender go through the process of taking back the home and then trying to sell it themselves.
Like I mentioned earlier, lenders and loan servicers are not in the real estate business and certainly do not want to be. This is why you will be penalized the most when a foreclosure is initiated. However, sometimes this is the only option available.
If there are multiple lien holders on the property, for example if you have a 1st and 2nd mortgage, then you may not be able to get both lenders to agree to doing a short sale. You may then be forced to simply walk away from the property.
Having your house underwater is never ideal, but as you can see, there are options for when you are faced with this problem. Reach out to us with any questions you might have, we are always here to help if you need it!