Under Water Homes On the rise. - Real Estate Global Network

An underwater home is quite simply when a homeowner who has greater debt (larger mortgage amount) than their house is worth (as defined by the current market value of the home).

According to Zillow, a real estate search portal that researches outstanding loan amounts on certain properties and compares them with estimations, those homeowners with underwater homes has continued to rise! This has been to the tune of 15.7 million homes during the first three months of the year.These figures show 31.4 % of all homes are homes with mortgages, up from 31.1 % during the last three months of 2011. In reality, not all homeowners have mortgages. And not all homeowners are severely behind on their mortgages; maybe 1 in 10.

So what are the problems of being underwater in a mortgage? There are three general problems; the most obvious problem being that in order to move, homeowners have to front a lot of cash in order to make up the deficit. This is why homeowners in this type of situation end up stuck because they will never make enough to pay off the original loan unless they have a great deal of money in reserve. For example, while the standard definition of being underwater is cited above, its important to consider the selling a property costs money (usually as much as 7-8% for realtor fees, transfer taxes, etc). So, a mortgage of $100,000 on a $100,000 may still be considered underwater since the proceeds from the sale would only generate about $92,000, $8000 short of covering the entire loan.

Another problem with having an underwater mortgage lies in, for example, the lack of employment in an area?homeownders end up in what is called a forced-move situation. Homeowners must be foreclosed, or come up with a creative solution, like renting their current property and moving into a rental in the new location.

Finally, and probably the most pervasive problem is, the homeowners? inability to refinance at a lower rate. Quite simply, banks and mortgage lenders don?t want to take the risk?it shifts the risk from the current lender to the new lender and lenders aren?t willing to take the chance!

Current underwater mortgages are representative of nearly 1.6 million homes that could eventually hit the market as a distressed property. Distressed properties are quite simply properties such as houses or even business lots that are extremely run down, whether from owner neglect, not being rented, or abandoned. These types of homes sell at discount prices but unfortunately, these discounts drag down home prices.

So, what should a homeowner do who has an underwater home? Basically the financial equivalent of holding your breath. Keep making the loan payments on time. This, in turn, can preserve your credit report and score through the downturn. Eventually, by sheer math, you?ll own more of the home. If you have any difficulty keeping up your payments, contact your lender to determine your financial options. In dire situations, lenders can make loan modifications to either suspend principal payments, reduce interest rates, or re-amortize the loan to a longer payback period. Remember, lenders don?t want to foreclose on your property, especially in the current housing market. They?ll be willing to work out options with you if you are serious about your commitment to them.

As a last resort, a short sale is an option for those who must move. In a short sale, the bank authorizes you to sell your house for less than the total mortgage value and they agree to take a reduced payment for the loan. There may be an impact to your credit score in this case, so it?s still a lose-lose, but it?s better than the alternative of full foreclosure.

Syd Chase

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