- Division 7a Loan Agreement
By Sean A. Kelly
The troubles in the housing market do not seem to abate and there are many homeowners now who owe much more on their mortgages than their houses are worth. A homeowner who finds himself or herself in such a situation is burdened with what is termed as an upside down mortgage. Being upside down means that homeowners have stopped accruing any equity and that they’re essentially sinking their funds into a money pit. For those who are stuck with an upside down mortgage, getting out from underneath the loan may seem impossible. Fortunately there are a few options available to such people.
Many homeowners have begun to resort to stop making payments, mail their house keys to the lender, and simply walk away. The internet is full of condemnation from real estate bloggers for these ‘walk away homeowners’ who are considered to be irresponsible and selfish. The general feeling is that despite the fact that walking away from a mortgage won’t land a person in jail, these homeowners have a moral obligation to satisfy their end of the contract. But it so happens that there are experts in the industry who advise homeowners to walk away from their houses as soon as they become upside down on their mortgages. The struggling homeowners are advised to keep their credit cards and car payments up to date because these offer more tangible rewards than homeownership that’s not building any equity. There are even certain companies that for a small fee offer assistance to buyers who are considering walking away from their homes.
While walking away is always advised as the last resort, there are a few options you might want to explore if you are in this kind of a situation.
Wait it out
In a situation where you owe more than your asset is worth, a good option can be to simply stay where you are. Depending on various factors, this can be the best option. If your personal situation allows for it, it may be a good idea to just sit tight until the value of the house recovers.
Go for a short sale
If you are able to negotiate it with your lender, you may like to go for a short sale. With a short sale, your home is sold at its current market value and the lender writes of the rest of the loan. While completing a short sale will reflect negatively on your credit rating, it would be still better than having a foreclosure on your credit report.
Go for voluntary foreclosure
If your lenders are not willing to negotiate a short sale or if you aren’t getting any help for mortgage foreclosure from them, you might choose to complete a voluntary foreclosure instead. Since in this case you willingly surrender your home’s deed to the lender, it will indeed reflect poorly on your credit. But, initiating a voluntary foreclosure can allow you to decide when you are ready to cut your ties with the home and in that sense it can put more power in your hands.
Rent out the home
In case you are able to find a tenant who is willing to pay a reasonable amount as rent, you might want to consider renting out the home until its value comes back up. Even if you aren’t able to rent the home at a rate that covers all of your expenses, it still might be a better option than taking a huge financial hit in a down economy.
Refinance your mortgage
If you are only slightly upside down with your home and if the real issue is that you are not able to afford making your payments, you might want to consider refinancing your home. The government’s Making Home Affordable program may provide you with the mortgage help that you are looking for and you may be eligible for a loan for up to 105% of the value of the home.
You do have many options if you are upside down on your mortgage loan, but it may be important to try all of your options before taking the drastic step of walking away. It is never advisable to default on your payments and if you do so, it will definitely leave a black mark on your credit for many years to come. It is advisable that you consult a professional to get the best advice on how to deal with an upside down mortgage keeping in mind your particular financial situation.
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