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By: Mellody Hobson, Special to BlackAmericaWeb.com

 HouseMy wife and I recently learned our house is worth significantly less than what we owe.  I’ve heard that many people in similar situations are walking away from their mortgage, even if they can afford their payments. Is this a smart thing to do? –  Marcus, Dallas, TX

No, it is not a good idea. Walking away from your mortgage should always be the last resort, when all other options have failed. Why?  Because doing so would be extremely detrimental to your credit, shaving off at least 100 points of your credit score and making it virtually impossible to qualify for another mortgage for at least seven years.

Regrettably, Marcus is among 16 million homeowners who are currently “underwater” or “upside down” in their mortgage, and unfortunately, he is correct that more and more people are choosing to just walk away, even if they can afford to pay the mortgage. This tactic is known to as a strategic default or voluntary foreclosure. And, according to Citibank’s mortgage unit, one in five borrowers is using a strategic default to simply walk away from their home. 

What exactly is an underwater mortgage?

In an underwater mortgage, you owe more than your home is worth. For example, the median price of a home today is $170,000. So, if your home value is $170,000, but your mortgage is $200,000, you are underwater $30,000. Meaning, even if you sold your home, you would still owe the bank more than you would receive from the purchase price. A recent study has shown that the more underwater you are, the higher the likelihood of default. Borrowers who are about 10 percent underwater – your mortgage is $200,000, and your home value is $180,000 – are unlikely to default. But if you are underwater 50 percent – your mortgage is $200,000, and the home value is $100,000 – your likelihood of default rises significantly, even if you can afford to pay your mortgage.

What can you do if your home is worth less than your mortgage?

If time is on your side, meaning you are not looking to sell your home in the near future, waiting for home prices to stabilize might be the best approach. However, if your mortgage is underwater, and you can’t afford the payment, your first step should be to reach out to your lender to see if you can renegotiate the terms of your loan.  Keep in mind your lender also wants to avoid foreclosure, as it is costly to them as well; they may lose 20-25 percent of the loan’s value when the home is foreclosed. 

Isn’t there also help from the government?

Yes. Homeowners may qualify for refinancing assistance through the federal program called the Home Affordable Refinance Program (HARP).  HARP allows homeowners who are current with their mortgage – meaning you have not been more than 30 days late on your mortgage payment in the last 12 months — to take advantage of low interest rates to refinance their existing loans (30-year fixed mortgage rates are hovering just above 5 percent). This program allows you to refinance for up to 125 percent of the appraised values, so if your home is appraised at $100,000, you can refinance an underwater loan up to $125,000. To qualify, you also need to demonstrate the ability to pay the new monthly mortgage amount, and your current mortgage must be guaranteed by either Fannie Mae or Freddie Mac. 

How do you know if your loan is guaranteed by Fannie Mae or Freddie Mac?

If you are unsure whether these agencies guarantee your current loan, you can either inquire with your current lender or you can look up your loan on the Fannie or Freddie Web sites (fanniemae.com/loanlookup or freddiemac.com/mymortgage, respectively). 

What if you cannot refinance under HARP?

The Hope for Homeowners (H4H) may be helpful.  This voluntary program provides a way for lenders to assist borrowers who are struggling to pay their mortgage by allowing them to refinance into more affordable FHA-insured mortgages. If your lender participates in this program, the lender will write down the size of the mortgage to 90 percent of the current appraised value, and your monthly payment will be below 31 percent of your income. To qualify, you need to provide documentation that your current monthly payments are unaffordable, the home must be your primary residence, and your mortgage must have originated on or before January 1, 2008. 

If refinancing through these programs is not an option, then what?

If you simply cannot afford to stay in your home, you may want to consider a short sale.  This type of sale occurs prior to foreclosure.  In this scenario, the lender is willing to accept less than what is owed on the mortgage, usually because the value of the home has dropped since the original purchase. The lender either absorbs the difference or requires the homeowner to pay it back in a lump sum judgment or payment plan. A short sale allows homeowners to walk away from their houses without going into foreclosure and seriously damaging their credit.

By: Mellody Hobson, Special to BlackAmericaWeb.com

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