Mortgage Modification For Underwater Mortgages

More and more homeowners with underwater mortgages are walking away, even if they can afford the payments. As the market values for their houses continue to plunge below the debt principal they owe, letting these underwater properties fall into foreclosure has become more and more widespread. Of course, why would anyone want to continue throwing money away to feed the decreasing value of their properties especially those who managed to buy a home with no money down.

While defaulting on an upside down mortgage purposely sounds logical, you may end up facing both legal and financial consequences in case you are not aware of it. If you are still able to make monthly mortgage payments, you may want to consult a mortgage law lawyer that will advise you on your best options to save your underwater mortgage with a loan modification.

So what is an underwater or upside down mortgage?
If you have bought a home in 2006 to 2007 prior to the collapse for $300,000 dollars, and you still owe $230,000 on the mortgage but the current market valuation for your property has dropped to only $210,000. That means you still need to pay $230,000 for a house that is worth $20,000 lesser; so why not walk away and buy another house valued at $210,000 with a new mortgage for $210,000 instead?

When to consider a strategic home loan default?
Rationally, why pay that $20,000 to the lenders for nothing? This is known as a strategic default which sounds perfectly reasonable but does have some major consequences. Otherwise, if you can continue to afford the monthly home loan payments, you can wait for the housing market to turn around and see house prices going up again.At the same time, you need to know the differences in good debts versus bad debts since home mortgage is generally considered good debt.

There are several factors that need to be considered in order to make a strategic default decision to walk away from your upside down mortgage. If you are unemployed and your current location has little career prospects for you, financial advisers will advise a strategic default.

In many cases, if homeowners can find a buyer before the sheriff sale, a short sale will benefit both lender and borrower. This requires the lender to agree that they can sell the house for less than what they owed on the mortgage while the lender write off the debt balance. This is less damaging to their credit score and a short sale remark is left on their profiles for only three years. However, it is not easy to find a suitable buyer to close a short sale as there are too many underwater houses on the market compared to home buyers.

Deficiency judgments after walking away
Depending on the state you live in, a strategic default to avoid further losses on your home loan can wind up with a deficiency judgment lawsuit filed against you by your lender. While you wanted to avoid losses, your mortgage lender wants to recoup their loan principal as well. The lender can go to court and demand payment for what is owed after the sheriff sale of your home, the foreclosure expenses involved and the mortgage balance you still owe.

While lenders seldom pursue deficiency judgment lawsuits against homeowners in financial hardship, they do have the legal right to do so up to 5 years after you have been voluntarily or forced into foreclosure in some states, such as Florida.

Due to the increasing volume of strategic defaults by home owners with upside down mortgages, it is no surprise that lenders are starting to get aggressive with suing for deficiencies on houses the have to repossess.

On the other hand, some homeowners even decided to go all out by filing for bankruptcy right after being forced through foreclosure because it will help wipe out a mortgage deficiency. These borrowers deem it as a necessary step because they live in places such as New York, Utah etc that do not have non-deficiency laws and non recourse mortgage loans.

In another vein, somehow the anti-deficiency laws in California and Arizona has fueled the decisions of many homeowners in upside down mortgage to seriously take up voluntary default as their lenders can only take back possession of the property but cannot sue them for deficiency. However, lenders can still pursue borrowers on second mortgages. If you have refinanced your first mortgage, these lender can file a deficiency judgment against you.

Damages to your credit scores for 7 years
Even though the banks may not pursue deficiency judgments on foreclosure victims, these homeowners will still have a bad credit report on their profiles from an involuntary foreclosure, short sale or strategic default. Most real estate attorneys in Florida recommend that clients to avoid strategic defaults no matter how desirable it seems on the surface. The damage to your personal history can last for seven years, and that is going to cost a lot more than the shortfall caused by plummeting home prices.

A stain on your credit profile will affect everything from no more low APR credit cards, difficulty to get low interest car loans, higher automobile insurance, and even your chances of getting a new job can be ruined.

Even after allowing their house to fall into foreclosure, there are still other money problems coming their ways for these homeowners. It is not cheap to relocate your family, and there are new school arrangements for the children, your workplace matters, rentals for a new home etc. Aside from these transaction costs, it can be disruptive on your lifestyles to get uprooted and settle in a new unfamiliar place.

Tax costs of foreclosures
Currently, the Mortgage Forgiveness Debt Relief Act that is in force from 2007 to 2012 allows taxpayers to exclude their mortgage balance if it is under $2 million or less. This tax exemption is only for your primary home, but there are other tax exclusions for second homes, investment and rental properties. This is a one time measure in view of the sudden increase in foreclosure victims nationwide. But do not forget that there is still state taxes to contend with, such as homeowners in California.

In view of all the potential tax problems they are not aware of, homeowners should consult a tax attorney before going ahead with a strategic default or short sale. Most of the time, negotiating and modifying your mortgage with the lenders is still a better option over the long term as you can still keep your house and do not need to worry about future accommodation matters.

However, it is not uncommon for lawyers to still recommend walking away from a serious underwater mortgage after weighing through all other alternatives. Sometimes, home loan modifications may not be possible or you are still unable to afford the reduced monthly mortgage payments. For more info, check out https://www.usbank.com/home-loans/mortgage/


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