Upside Down?Don't you mean "Underwater?" What do you even mean?

With all the recoil in the housing market these days, the term upside down or underwater is being used in our vocabularies quite often, especially as it applies to your mortgages.  So what exactly does it mean to be upside down orunderwater?

Being upside down or underwater in a mortgage means that the total debt secured by a property (e.g., the total value of all mortgage loans), exceeds the appraised value of that property.  Being upside down or underwater indicates a negative equity position. For instance, if you have a first mortgage for $100,000; and a second mortgage for $20,000, but your house appraises for only $110,000, you are underwater by $10,000. The term I hear and I have always known is upside down. You may have heard it as under water, but they are interchangable.

Being upside down isn't something we EVER heard 3 years ago. It was all gravy. Prices were up 40% in one year. Most small time investors thought it would keep prospering. Fast forward back to now and it is still shoking to realize that 1 in every 4 homes in Phoenix, Mesa, Chandler, Gilbert, and other surrounding areas is upside down. So 25% of our Maricopa County houses are sinking. That is a sobering statisitic.

How does an upside down home affect your life?

The most significant problem caused by being upside down in a mortgage is the inability to move without putting up a large amount of cash to make up the deficit in value.  Since selling the property will not net enough proceeds to pay off the loan, you are essentially stuck in your current residences unless they have a large financial reserve. Aside from selling you will not be able to refinance. Sure there are programs right now that will allow you to refinance if you are just a bit negative. The programs have a cap, usually below 25% negative, that you must be under in order to qualify. Remember Phoenix, GIlbert, Chandler, Mesa, and other area values are 48% down from the peak in 2006! That means the refinance option is out for a lot of you.  It is possible to try renting, sure. However, you will still have that liability tied to your credit profile. Lenders are not going to warm to the idea of lending you more money when you currently have a negative property on the books. It is fair to mention your morale. Our client were devastated by their situation, at least until we gave them some uplifting news on their options. It is not pleasant to have that, "What I am going to do with my house?" conversation in your head.

Thanks for the news! Now what?

Here is the great news! You have options. Quite a few actually.

1) Keep on trucking

It is possible for you to just to stay in your situation. Yes you are upside down. Yes you are stuck. The other side of the coin is you may not need to go anywhere. This may be an expensive option. If you were to sell it and buy a smaller place, you could have a much lower payment. That along with the fact you may never see any positive equity again. Not my favorite solution as I am sure it is not yours either.

2) Rent it out

We won't go over this too much again. Your simple math here is cash flow. Can you rent it out for what you owe? More so, can you do it AND cover the fix up costs along the way (to the tune of a couple thousand per year?) If so, this option may work. You could also take a slight loss if your income can handle it OR you move into a much cheaper place. If not, read on!

3) Renegotiate the mortgage

This can mean a lot of different things. If your lender agrees, pretty much all the terms of your mortgage are negotiable--the interest rate, the number of payments, maybe the balance due. Lowering the balance due is the last resort, so don't count on it. So there are different programs out now to help lower the obligation.
A modification is a permanent change to the terms of the note. THis means they lower the rate for 5 years, or forever. A forebearance would just tack the delinquent payments onto the end of the loan. The government came out with a plan in 2009 that states most homeowners should be able to modify their payment down to 31% of their gross monthly income. Make a not that most SHOULD qualify, not everyone. We are finding that there are too many fish in the sea to help. THis is a big problem for the government. Another issue is a lot of our previous clients are ending up back in default a few months later. All too often the homeowner changes their rate, but not their lifestyle.

4) Ouch here it goes... foreclose

It almost sounds like a bad word. Yes if you choose to do nothing and just stop making your payment, you will get foreclosed. Here in the Gilbert, Mesa, Chandler, Phoenix, Scottsdale area that means your home will get sold at the court house steps during a "Trustee's Sale" and that just means the bank hires someone to take it back, like an escorw company. Arizona doesn't go the court route. There is a better way to try and settle the default and that is deed in lieu. That means you just hand over the keys and ask the bank to forgive the debt. If they don't go for it, there is one more option and by far is THE BEST OPTION!

3) A short sale

This is where you get the bank's permission to sell the house for less than the balance due on the mortgage. Normally in the past the IRS could go after you for the difference. That changed when the Bush administration made the 2007 Debt Forgiveness Act. THey stated that you could take the loss and not owe the diffeence, in most cases up to $2,000,000. You MUST verify this information with your lawyer AND cpa. We do not give legal advice here. Our experience has shown short sale to be the best option. THis is an understatement. There are so many reasons why our past clients thought at first they could never get their house sold as a short sale. We can assure you it doesn't matter how far upside down you are, if you are renting it, the condition, how much money you make, how many houses you own, etc. This comes down to good business. Does the lender want to save themselves $30,000 and not let it get to foreclosure? They get that choice. Please submit your basic information and we will tell you what your neighborhood is selling hoems for on the MLS.