Kari McCoy commentary: What is an underwater home?

Question: Dear Kari, I was at my bank last week standing in line and overheard some people talking about an underwater home. Can you please explain this to me? Answer: Thanks for your good question! An underwater mortgage, also referred to as upside-down mortgage and negative home equity, is when a home loan principal balance is larger than the value of the home. Simply put, the homeowner owes the lender more money than the home could currently sell for on the open market. This is fairly easy to determine if a home is underwater; find out what the home would sell for and subtract the home loan balances and any other costs that may apply, for example taxes, Mello Roos or HOA dues, and there is the answer of the amount. There really is no cause for alarm in the event you discover your home is underwater. Most folks are happy to stay in their home and build equity by continuing to make their monthly payments and with each payment made it will chip away at the total loan amount owed. They also think of the many benefits owning a home provides, to name a few: freedom and stability of having their own home, along with the tax benefits going into their pocket instead of a landlord's pockets. Let's look at some options in the event a homeowner is not willing or can't afford to continue to make monthly mortgage payments on the home: · Ask for a loan modification for your mortgage and or ask for the loan term of 30 years to be extended to 40 years. The good news is, if this is granted, this will not affect the current monthly payment amounts. · In California, now there are some options of refinance loan programs for folks that are underwater, as long as the borrower can still qualify with income along with meeting their credit guidelines. · Consider applying for a short sale (lenders do not have to agree), which is a type of home sale where a bank agreed to accept less than the total remaining mortgage balance. It is good to know this sale will affect your credit score for two years. · Consider the thought of renting out the home, to keep up the monthly mortgage payments. · Sell the home and use your savings to pay the amount you still owe. This would not affect credit scores. · Foreclosure on the home. This can take place in the event monthly payments are not kept up. The lender is legally entitled to seize the home to recover as much of the loan amount as it can. This can stay on your credit score for seven years and in some cases longer. · Declare bankruptcy. This process is costly and there are two types: Chapter 13 means the court will create a plan to repay some or all of the debts and may allow you time to get caught up on back mortgage payments. The court may monitor your payment plan and monthly payments for a possibility of five or more years. Chapter 7 means all of your assets will be sold by the court to help repay your debt. This could mean you lose your home, cars and any other assets. This type of bankruptcy will stay on your credit for 10 years. If someone finds themselves in need of taking action with any of the above mentioned, reach out first to your local professional real estate agent to determine the value of the home. This is a free service they all offer. In addition, find out if the area the home is located in is on the upswing or down swing. In some markets, if you wait a little bit, future gain in equity could be your best answer. Be wise, and before making any further moves, I would like to suggest talking with a financial advisor, accountant and perhaps an attorney. This way, you will have all the information to make the best decisions. Please keep in mind that several folks have found themselves in the situation with underwater homes and they got through it, and many others will follow suit. I hope this information finds you well. Kari McCoy owns the Kari McCoy Group, residential real estate at Lyon Real Estate. She can be reached at (916) 933-5274 or e-mail at sold@karimccoygroup.com.