“Underwater” mortgages: A new cure

Experts estimate that there are roughly 14 million homeowners who owe more on their homes than they are worth.  If you are one of these homeowners, you are stuck.  You cannot pay off your mortgage when you sell your house, and it may be years (or never) before the value of your house once again exceeds your mortgage.

Even if you can afford your mortgage this is a very frustrating situation —  so frustrating that many homeowners are choosing to make what is called a “strategic default” by simply walking away from their house and fighting the lender if it comes after them for the balance of the mortgage.  You can often avoid paying the balance, but the downside is that your credit rating is going to take a big hit.

Now the FHA is offering an alternative, which may help some homeowners (emphasis on the “some”) refinance their house at an amount that is much closer to its current value.  The main requirements are these:  Your lender must agree to cut the mortgage balance by at least 10%; the new loan must not be more than 97.75% of the current value of your house, and you must have a credit score of at least 500.  The FHA will then insure the new loan as an incentive to the lender.  So, if your mortgage is, say $200,000 and your house is worth $150,000, the FHA will insure a new loan for as much as $146,000.

All this sounds great, I know, but remember it is only voluntary.  The FHA is not covering all loans, only some.  Also, your lender may not want to participate, and no one knows what to do with the second mortgage, if you have one.

And never forget the paperwork.  Lots of paperwork.   But if you think you might qualify, this is a far better way to go than a defaulting on your loan.  Give it a try!  You might start with free government counselors.    There are local organizations in every state, financed by HUD, that will help you.  Click here to the HUD List of Avoiding Foreclosure Resources, by State.

Comments are closed.