Owing more money on your mortgage loan than your home is worth—commonly referred to as being “underwater” on a home mortgage—can seem hopeless.
There were 6.7 million underwater homes in the U.S. at the end of the first quarter of 2016, representing 12 percent of all properties with a mortgage, according to RealtyTrac. The numbers are dropping since a peak of 12.8 million homes in 2012, when 28 percent of all properties with a mortgage were underwater.
For people still underwater, those numbers don’t offer much solace. However, there are some options for underwater homeowners, including:
Short sale: If you have to sell your home, a short sale may get you the most money. Your lender has to agree to let you sell it for less than you owe, which may lead to the home being sold quicker than it would otherwise.
Your lender must agree to the lower price, and it will take the loss, and your credit score will fall. Lenders can also reject short sale offers on your home, causing the deal to fall through.
Refi: Refinancing your home loan won’t increase the home’s value and may still leave you underwater, but you’ll have a lower interest rate and a lower monthly mortgage payment.
It can be almost impossible to refinance with negative equity. The federal government’s Home Affordable Refinance Program, or HARP, helps by giving lenders incentives to help underwater homeowners. Loans can be refinanced at 105 percent to 125 percent of a home’s value.
To be eligible for HARP, the loan must be owned or guaranteed by Fannie Mae or Freddie Mac, and the borrower must be current on mortgage payments, having not missed a payment during the past 12 months. If you don’t have a good credit score or high enough income, you could be denied for HARP.
Another option is the federal Home Affordable Modification Program, or HAMP. A financial hardship that puts the mortgage in default must be shown. This isn’t a refinancing option, but a way to change the contract terms to lower your payments for up to 60 months.
Walk away: If you don’t think your home’s value will ever come back, you can walk away from your home by no longer making monthly payments and defaulting on the loan—called a strategic default.
Some consider this unethical, and the foreclosure that will eventually occur will hurt your credit score and stay on your credit report for seven years.