Treading Water, or Downright Drowning?

Some put the number of borrowers underwater in their mortgage, at 11%, while I have heard others putting that figure much higher, at as high as thirty percent.

Regardless of the figures I think we can all see that the industry is still in shambles and will be for some time yet. So what can those who are upside down, or underwater, due to prevent the seemingly inevitable foreclosure?

The problem in part is that even though the federal government and states are working to help people avoid foreclosure those programs are not for people with negative equity. The good news is, lenders are beginning to come around and help. It is in no ones best interest to foreclose. The borrower loses his home and his credit is trashed for years. The bank has to maintain the home and put in the work to sell it. They often take a loss.

If you are current on your mortgage and can make the payments in the foreseeable future do not expect help. Banks want to know there really is a hardship. However there are a couple things you can do.

Loan Modification: There are some hoops to jump through here. First off you must be able to stay in your current loan. Lenders usually will require a letter explaining your financial hardship. How did you get into your current position? You will need to provide detailed financial information, including bank statements and budget proving that you can handle the payments if the bank does a loan modification for you. Many lenders refuse to work with you until you are delinquent, but you should contact them as soon as you see a problem developing.

If you feel that you need a loan modification contact your lender and start getting your financial ducks in a row.

Short Sale: Here is a much lesser known route you may qualify for. A short sale is when your lender lets you sell your home at a loss with the understanding that it will have to take the financial hit. Short sales have been all but unheard of because we have had a real estate market that virtually guarantees your home value will go up. You can expect to sell it for a gain even if you put no money down in the purchase. To do a short sale you first have to be delinquent on your payments. Then come the required documentation; bank statements, an appraisal, etc...You will also need to show you do not have money to cover the amount your home is underwater. Now here is the hard part. You have to find a buyer and if your neighborhood is littered with for sale signs, this may be one tough short sell. The process is not a fast one and typically takes a number of months to close. If you decide to pursue this avenue you need to talk to a real estate broker and a lawyer familiar with this kind of transaction.

The good news is you won't take a tax hit on the amount that the bank forgives. It use to be that if your home is sales for thirty grand less that its value the bank forgives the thirty and it is treated as regular income. No so today with the Mortgage Forgiveness Debt Relief Act of 2007.

Your credit will take a pounding, much like it would if you went the route of a foreclosure. Bottom line, keep the lines of communication open with the bank just as soon as there is a hint of trouble. Remember, lenders really do not want to foreclose, that is a lose lose proposition.