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When to move on from your underwater mortgage
A "for rent" sign is posted in front of a house.
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What do you do when the home you rent out is starting to cause you more trouble than it's worth?
That's a problem facing Alayne, a program coordinator who bought a home five years ago that she rents out (while she and her husband live in another home). But after a bad experience with the rental home's first residents, repairs took their toll on her finances. Now the house is underwater -- she owes more on her mortgage than the home is worth.
Alayne says the home she bought when she was single is slowly draining her and her husband's savings and income. The two have since bought a new house together.
"We are not able to get enough in rent to cover the mortgage [on the rental home] and the mortgage is going up," she says. "We're looking at maybe a $200-300 drain each month."
Should she short sell the house?
"With a short sale, it's going to trash your credit as much as a foreclosure," says personal finance expert Liz Weston. "What it does do for you is that you're in the penalty box with mortgage lenders for a shorter period of time."
Click play on the audio player above to hear more advice.
I was in a similar situation. I live in Florida and my house was worth much less than my mortgage. I decided to do a short sale. I had a HUD loan and BofA carried the mortgage. First, I tried to do a loan modification which BofA denied without giving me a reason. In order to qualify, for a short sale I had to prove hardship along with stop paying my mortgage so the bank would pay any attention. I agonized over the decision to stop paying my mortgage, but the bank was not willing to even talk to me as I was current. I finally took the plunge and in July 2010 I did not make a payment. I wrote my hardship letter, provided all the documentation they required and a year and two months later, my house was sold in a short sale. My debt was forgiven as part of the HUD program. I also was able to have to pay taxes on the forgiven debt (which was considered income) through the Mortgage Debt Relief Act of 2007. I used IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. However, this expires either at the end of 2012 or 2013. My broker suggested I stop paying all my credit cards and just file for bankruptcy, which I refused to do. I had to get rid of the house, but I am not a dead beat person and I was going to pay my debt. My credit score has not suffered at all! My Fico Score is 760 and I get credit offers every day. I have downsized my life and I am now renting though still dream of owning my home again, though at my age, a young 59, I do not think that is wise anymore. I will be completely out of debt by October of 2013 and I plan to retire in 6 years, 4 months, 23 days, 18 hours, and 17 minutes! I did a lot of research, became very knowledgeable on short sales and their consequences and stayed focused and now I have peace of mind!
Minnesota has a network of nonprofit housing counselors providing free and low-cost services to homeowners. Find out more at www.hocmn.org. Nationally, HUD approves counseling agencies and keeps a list of approved agencies on their website, www.hud.gov.
While among real estate agents you should find significant expertise around short sales, agents get paid when homes are sold. Speak to a housing counselor in addition to a real estate agent, for much the same reason someone with substantial credit-card debt should speak with a credit counselor as well as a bankruptcy attorney.
For homeowners who have weighed their options thoroughly, and ultimately decided upon a short sale as the best course of action, housing counseling agencies have built expertise as well as networks of contacts and communications systems with lenders helpful to homeowners and real-estate agents alike.
