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Homeowner with underwater mortgage contemplates foreclosure
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Homeowner with underwater mortgage contemplates foreclosure

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Q: I am a widow in my 70s and my mortgage is underwater. In addition, the house is in need of much repair. Can I just let the bank foreclose and move on? I don’t want to buy again, just rent.

A: It sounds like you’ve given up on your home, and on the idea of homeownership.

When a home is underwater, the value of the mortgage amount you still owe exceeds the value of the property if you sold it today. That may be true — or not. There are a few neighborhoods around the country where homes haven’t risen tremendously in value over the past, and perhaps you live in one of those. Or, perhaps your home is worth more than you imagine.

The other issue you mention is the condition. If your home needs a tremendous amount of work to be livable, and your neighborhood housing values are depressed, then it’s quite likely that your home is only worth the value of the land underneath it.

The last consideration is what it costs you to live in your home. If you walk away from the property, you’ll still need to live somewhere. Unless you move in with children or a friend, there will be a cost to that, and there may be a cost to packing up and moving your belongings to the new residence.

So, how do you resolve these issues? Start by talking to a few local real estate agents about your home and ask them to help you determine the value of the property and of the land (if they believe the home is a “teardown” or not worth saving).

Once you understand what the property is worth, you can then determine whether your property is underwater. For the sake of discussion, we’re going to assume that the property is underwater at this time. Now you have several options. You can try to call your lender and see if they have a program in place to help. Some, not all, lenders will work with borrowers to either refinance the loan at a newer rate or do that and also lower the principal amount owed on the loan.

If you had some equity in the property, you might be able to get a reverse mortgage. That allows you to tap the equity to use to fix up your property or pay some bills. It’s more expensive than a mortgage or home equity loan, but you owe nothing until you sell the property or move out of it permanently. It’s an interesting option for homeowners who are 62 and older, and are house rich and cash poor.

If you’ve decided that nothing will work, you can sell the property. If you’re truly underwater, the sale will be known as a “short sale,” which means you are literally short the dollars you need to come out of the sale without owing money to anyone. You’ll need to find a buyer and ask the lender to approve the short sale.

When a lender approves a short sale, the lender will agree to release the lien of the mortgage that they have on your home and allow you to sell the home to the buyer. In turn, they may also cancel the unpaid balance on the debt (you should ask for this).

When it comes to your credit history, any of these options will have consequences. A foreclosure, a short sale, a deed-in-lieu of foreclosure and even a loan modification are all negative pieces of information that will stay on your credit history for years and are likely to depress your credit score. A loan modification is better than a short sale, which is better than a foreclosure.

While you’re in your 70s, and say you don’t want to buy another home, if you need to rent another place to live, that landlord will surely check your credit score. Managing your credit history may not be the most important thing on your list at the moment, but we wanted you to be aware of the possible fallout.

As for letting your home go, some homeowners are able to sit back, stay in their home, not pay the lender and simply wait for the foreclosure to go through the process while paying no rent, real estate taxes or insurance premiums. While the lender surely loses out in this situation, it isn’t easy for the homeowner who knows that an eviction or other foreclosure orders will be coming down the road.

Try to understand what your property is worth, then determine what if anything you can do with your lender. If there’s no loan accommodation possible, then you can then decide to sell the home in a short sale or hand the keys back to the lender and move on with your life.

In these tough times, losing your home will feel like another loss. But hopefully you’ll be able to move on and find another safe place to live.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)

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