What Do I Do If My Home Value Is Less Than the Loan?

Research home values in your neighborhood when exploring your housing options.

Realizing that your home is worth less than the amount of your loan can be sobering. Historically, real estate investments were relatively steady and stable, even during market fluctuations. Although you cannot predict when the real estate market will turn around, you have options on how to handle your current living situation when you owe more on your house than the current market value.

Stay in the Home

Analyze your budget. If your current mortgage and escrow payments still fit within your budget, one option is to continue paying your mortgage. By continuing to make your payments, you help protect your credit score, stay in a house you enjoy and wait for the housing prices in your area to recover and rise. The disadvantages of doing nothing include living with the uncertainty of how long, if ever, the market will take to recover, and being unable to buy or rent another house whose payment is lower, thus saving you money.

Find a Tenant

Renting your house to a tenant is an option which allows you to retain ownership of your house, but move to a different house or city. Analyze the total monthly cost of owning your current home. Include your mortgage payment, insurance cost, taxes and average monthly repairs. Look for a reliable renter who will take care of your home and pay the rent on time. You may be able to rent your home for less than your estimated cost, if your new house's mortgage or rent payment is substantially lower than your current mortgage.

Ask for a Short Sale

Your bank works with you to perform a short sale. A short sale means that your bank allows you to sell your house for less than the amount you currently owe on your mortgage. For example, if you owe $135,000 and can only sell your house for $100,000, the bank will either forgive the $35,000 deficit, or require that you pay a portion of the deficit. Consult with local real estate agents familiar with the market and your own attorney before deciding to complete a short sale. There may be tax implications on the forgiven portion of the debt.

Ask For A Renegotiation

If you like your house and want to stay in your neighborhood, consider calling your current lender first and asking to renegotiate some or all of the terms of your current mortgage. As of 2011, there are several different mortgage modification plans sponsored by the federal government that you may qualify for. Some adjust the interest rate, and some the balance. These options may allow you to stay in a house you enjoy.

Bankruptcy

Bankruptcy should never be your first move because of the long-term implications on your credit and your lifestyle. However, if you are unable to meet your mortgage, credit card, car loan and other obligations and see no positive changes in your financial outlook in the near future, bankruptcy may be an option. Before making the decision, consult with a bankruptcy attorney to determine your best options.

References

• "Bankrate.com"; Lessons from the Housing Bubble Burst; Tamara E. Holmes;
• "SmartMoney"; Should You Rent Out Your House or Sell It?; Aleksandra Todorova; July 2010
• MakingHomeAffordable.gov: Home Affordable Foreclosure Alternative (HAFA) Program

Resources

• Federal Trade Commission: Mortgage Payments Sending You Reeling? Here's What to Do