What can you do with an underwater home mortgage?

brick rancher on a sunny day

An underwater home mortgage doesn't offer have options, but new federal programs can offer some flexibility. Flickr photo.

Nationwide, CNN reports that about one in four home mortgages are underwater. An incredible 25 percent of borrowers owe more than their houses are worth. The Federal government has been trying to stop the bleeding with many new financing programs. There’s always mortgage loan restructuring, but what if you just want to get out of the house instead of sinking money into it?

Caught in a mortgage bubble

Many families who financed a mortgage a few years ago, before the real estate bubble burst, had double incomes from good jobs. A high monthly payment on an adjustable rate mortgage seemed affordable at the time, especially if refinancing later would result in an appraisal worth more than the selling price of the home. But the real estate bubble did burst, and prices have fallen an average of 26 percent nationwide. About 10 million people lost their jobs.

New federal refinancing program

With a home mortgage underwater and lower income, mortgage loan restructuring may be better than selling for a loss, even if you could close a deal. Moody’s economy.com reports that prices in 61 percent of American cities won’t return to pre-recession levels until 2015. But a new federal program that refinances existing loans into smaller FHA loans could lower monthly payments. People who haven’t fallen behind on payments can qualify — if their lenders say it’s OK.

Shortsale or foreclosure?

Free advice about underwater home mortgages is available at makinghomesaffordable.com. If a property does undergo a short sale, this website may be able to learn whether or not the lender can come after you for the difference down the road. An expert can also show you how to make sure that a short sale doesn’t damage your credit like a foreclosure would. Foreclosure should always be a last resort because it stays on your credit report for seven years.

Another option for an underwater home mortgage is to make a case to your lender that you are so broke you could just walk away. A cleaner option may be to ask your lender for a short sale, in which it would accept less than the loan amount. A breed of real estate agent called a distressed property specialist makes a living twisting the arms of reluctant bankers.

Other recent posts by bryanh