If your home value drops below the amount you owe on your mortgage, you are in a situation known as being "underwater" or having "negative equity." Here’s what typically happens and what your options are:
1. Continue Making Payments
No Immediate Consequences: If you continue making your mortgage payments on time, there are generally no immediate consequences, even if your home is underwater. Your mortgage terms remain the same, and your lender cannot take any action against you just because the value of your home has dropped.
Keep Building Equity: As you make payments, you’ll gradually pay down the principal, which can help you build equity over time, especially if home values recover.
Difficult to Refinance: Refinancing may be difficult or impossible if your home is underwater because lenders typically require that your loan-to-value (LTV) ratio meets certain criteria. Without enough equity, you may not qualify for a traditional refinance.
Government Programs: In some cases, there may be government programs designed to help homeowners refinance even if they have negative equity, such as the now-expired Home Affordable Refinance Program (HARP). Check if there are current programs available in your area.
Short Sale: If you need to sell your home but it’s worth less than the mortgage balance, you may consider a short sale, where the lender agrees to accept less than the total amount owed. This can avoid foreclosure, but it can still negatively impact your credit score.
Covering the Difference: If you sell the home and the sale price is less than the mortgage balance, you’ll need to cover the difference out of pocket unless your lender agrees to forgive the remaining debt.
Risk of Foreclosure: If you stop making payments because your home is underwater and you can’t afford them, the lender may initiate foreclosure proceedings. Foreclosure can have severe consequences, including a significant drop in your credit score and the loss of your home.
Deed in Lieu of Foreclosure: As an alternative to foreclosure, you may negotiate a deed in lieu of foreclosure with your lender. This allows you to voluntarily transfer ownership of the home to the lender to satisfy the mortgage, avoiding foreclosure but still affecting your credit.
Loan Modification Programs: Some lenders offer loan modification programs to help borrowers who are underwater. This could involve reducing the interest rate, extending the loan term, or, in some cases, reducing the principal balance to make payments more affordable.
6. Impact on Credit
Short Sale or Foreclosure: Both a short sale and a foreclosure can negatively impact your credit score. A short sale is generally less damaging than a foreclosure, but both can affect your ability to obtain future credit or loans.
Strategic Default: Some homeowners choose to walk away from their mortgage (known as a strategic default) when deeply underwater. This is a serious decision with significant consequences, including foreclosure, legal action from the lender, and long-term credit damage.
If your home value drops below the amount you owe on your mortgage, you are in a situation known as being "underwater" or having "negative equity." Here’s what typically happens and what your options are:
1. Continue Making Payments
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2. Refinancing Challenges
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3. Selling the Home
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4. Potential for Foreclosure
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5. Loan Modification
6. Impact on Credit
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