During the housing boom, buying a home seemed like a smart move as real estate prices skyrocketed. Individuals with good and bad credit alike were cashing in on the boom. It was a risk free investment since real estate can only increase in value. At least that was the thinking before 2006. Real estate prices have come crashing down to earth and homes are only worth a fraction of what they were before the crisis. Many homeowners are scrambling to stave off foreclosure. So, what are your options if you paid too much for your home?
Stay the course
It may seem pointless to make payments on your home when you are upside down but if you can afford to do so then you should. It is the best way to preserve your credit score and to honor the commitment that you made. It may take a few years but after while the amount that you owe on your mortgage will drop below the market value of the home. That is the point when you will be glad that you hung in there and kept up with your payments.
Apply for a loan modification
Banks are doing a horrible job of letting customers know that they are eligible for loan modifications. Financial institutions have a number of tools available that they can use to help homeowners adjust their loan payments. Banks can push principal payments to the last few years of a loan or lower monthly payments for a few years. Banks have the freedom to forgive interest and penalty payments. In extreme cases, banks may even forgive the principal on a loan.
Contact the government for homeowner’s assistance
Fannie Mae and HUD have programs that were specifically created to help owners stay in their homes. HUD has the Emergency Homeowners Loan Program which provides zero interest loans to unemployed homeowners. The maximum amount of assistance is up to $50,000. The loans can be forgiven over a five year time period. Homeowners have until July 22nd to apply for this program. Homeowners assistance programs can act as a bridge that helps homeowners stay in their homes during periods of unemployment and financial difficulty.
Do a short sale
Short sales are useful because they allow homeowners to avoid foreclosure. They are often a last resort before the foreclosure process is undertaken. A short sale lets a homeowner sell a property for less money than the amount of money actually owed on the home. Banks do not love short sales but they like them a lot better than foreclosing on a property. Banks will often to short sale transactions to keep another foreclosed property from ending up on their balance sheets. A foreclosure will ding your credit score but not as bad as a foreclosure.
There are several options available to you if you are facing a foreclosure. Exhaust all of these options before subjecting yourself to going through the foreclosure process.
I know so many people that have gotten themselves into this situation. Peer pressure, family pressure, or not knowing your real financial situation have all been factors.
I think this post is really helpful for those in this situation. I especially like your point about staying the course. Sometimes the best solution is to stay put and not make any changes.
I’m very glad I didn’t purchase a home a few years ago when everyone was screaming “buy!”. I’m not sure I’m ever going to purchase a home, as my goal is to retire as early as possible on passive income and possibly travel lightly and cheaply. However, the market is really nice right now and I see condos around me for $50K that are 2 bedroom and very nice. We’ll see.
I agree that riding it out, unless you are severely underwater, is always the best option. I definitely liked the article, thanks!
Luckily, my wife and I just started looking for a house and weren’t caught up in the housing boom. We just got our offer accepted on a 3 bedroom, 1.5 bath house for $78,000! Plus, the seller is paying for our closing costs!
I’m sure glad we waited to buy property!
Derek, that is a remarkable deal. You got an absolute steal!
I also paid too much for my house. It has a few things wrong with it and I am waaay to ashamed to say all the things I did wrong when buying it. I know I am stuck with the consequences of my actions, so does anyone have some words to make me feel better or see the light at the end of the tunnel? Right now I can only imagine future foreclosure because no one will want to buy it and I doubt I can afford to fix it up. My man is not a DIY dude. Now what?