4 Reasons Why Your Underwater Mortgage Won’t Be Saved By Eminent Domain

Underwater MortgageMany home owners have been affected by the recent housing market crash. Many people have lost their homes to foreclosure, while others ended up owning a home that is worth much less than it did when they bought it. Having to pay back a mortgage loan for a home that is worth much less than it did before the crisis will make most home owners want to get rid of it. Unfortunately, selling your home for less than you owe, means that you will have to pay back the difference to your lender.

Abandoning your home if your mortgage is underwater is a solution, but you will have to live with the consequences of foreclosure (Read: The Foreclosure Process). Having your credit ruined and not being able to take out a new loan for several years is not an option for most people. Because many home owners are underwater on their mortgage and facing foreclosure, many municipalities have started looking for solutions to avoid having to deal with whole neighborhoods of deserted homes. One of the ways in which counties and cities are trying to help home owners who own more than their homes are worth is eminent domain. Click here to read more.

What is Eminent Domain?

The power of eminent domain allows the government and its agencies to take private property and use it in a way that benefits the public. For example, the government can use a seized property for a school, a park, a new road and more. The owner of the property that is seized by the government under eminent domain is entitled to compensation, which is usually the fair market value of the property.

The government agency that is interested in your property hires an appraiser who will inspect and appraise the property, after which the organization makes you an offer. The offer will generally be low, but there is some room for negotiations. After the negotiations, if you are not satisfied with the offer, the organization will schedule a public hearing in which it will have to prove why your property is needed for public use. After the public hearing, the government agency will submit a complaint against you in court, which you can challenge, but it will be most likely overruled. Your attorney will have to obtain appraisal reports from other appraisers in order to determine the property’s fair market value.

Eminent domain can also be used to help home owner whose mortgages are underwater. Some analysts say that underwater mortgages slow down the economy, so using eminent domain will help the economy and allow people to stay in their homes. Others say that using eminent domain to save underwater mortgages will hurt the economy because lenders will react to this by increasing interest rates. Click here to learn more about the restrictions.

Reasons Why Using Eminent Domain Won’t Save Underwater Mortgages

Using eminent domain to save underwater mortgages was attempted in a few Californian cities back in 2012. The plan was abandoned because it didn’t receive the public support that was expected, and was strongly opposed by mortgage regulators Freddie Mac and Fannie Mae. While the plan to use eminent domain to come to the rescue of those with underwater mortgages sounds fairly good in theory, it has plenty of disadvantages. Here are the reasons why your underwater mortgage won’t be saved by eminent domain.

  1. The eminent domain process is very complicated. Many home owners won’t agree to this method because they probably won’t receive as much money as their home is worth at current market prices. Each home is different, has unique features, so designing a simple plan will be very difficult and will become bureaucratic.
  2. Eminent domain can be abused. Most people don’t support this plan because it can easily be abused, so some home owners may receive more than they deserve for their properties, or less. Also, home appraisals rely on the appraiser’s judgment, so there is a chance that mistakes will be made, and many properties will be appraised incorrectly.
  3. Lenders and mortgage regulators oppose this solution. Fannie Mae and Freddie Mac, who guarantee 90 percent of all mortgages issued in the United States, do not agree with using eminent domain to save underwater mortgages, so they are threatening with limiting business activities in cities that use this solution.
  4. The government will be put in an awkward position. Because mortgages are contracts between lenders and borrowers, a government intervention will not be well received by most lenders. The government usually refrains from interfering with private contracts.

Saving underwater mortgages by using eminent domain may seem like a good idea, but there are serious repercussions to following this plan, and most cities will most likely try other methods of helping those with underwater mortgages (Read: How These Alternatives Can Help You Avoid Foreclosure). Eminent domain has its uses, but using it to save underwater mortgages will only cause controversy and put the government in a bad light.

Underwater Mortgages: Is Walking Away or Doing a Short Sale Your Best Option?

Underwater Mortgages-Is Walking Away or Doing a Short Sale Your Best Option-150x150After the recent housing market meltdown, many home owners have found themselves underwater on their mortgages. Being underwater means that they owe more on their homes than the homes are worth, making it difficult to keep making mortgage payments. Knowing that you are paying significantly more for your home than what the home is worth feels like throwing money away and the majority of home owners will probably choose to get rid of the home instead of making payments for several more years. Having to abandon the home that you have created memories in can be very unpleasant for the whole family, but it is probably a better choice than throwing money out the window.

The problem with being underwater is that you practically have two choices that will get you out of this situation: you can either walk away from your home, in which case the lender will foreclose on it, or sell it for less than it was originally worth at a short sale. Both of these options have serious consequences, and there is no way around them, but you probably want to know which one is the better choice, which one will create less problems for you than the other.

Differences Between Walking Away and Doing a Short Sale

Several parts of your financial life will have to suffer as a consequence of both walking away from a home and doing a short sale. The most affected will be your credit score, and this is where doing a short sale seems to beat walking away from a home and having it go into foreclosure. With a short sale, the lender hopes to recuperate most of the amount that you owe him, and to avoid going through the lengthy and expensive process of foreclosing. Here are two main differences between walking away from a home and doing a short sale, and how they will affect you.

  • Your credit score. Walking away from your home will result in foreclosure, which will have a large negative effect on your credit score. Foreclosures typically remain on a credit report for up to 7 years, making it next to impossible for you to take out another mortgage loan and buy a new home. Short sales will also be added to your credit report, but worded as “settled for less” or something similar. Lenders prefer to recover some of the debt by doing a short sale instead of foreclosure, which takes a long time and is expensive. Your credit score has less to suffer when doing a short sale and it will be easier to recover, in only a couple of years.
  • Your ability to buy a new home. When walking away from your home, you can buy a new home after 5 years have passed, but with several restrictions, like making a larger down payment and paying a larger interest rate. After 7 years, the black spot on your credit report goes away and you are able to buy a new home without these restrictions, as long as everything else is in order. You can buy a new home right away after doing a short sale, as long as you haven’t missed any payments on your previous mortgage and the lender doesn’t require that you pay back the remaining amount. However, finding a lender that will give you a mortgage loan in this situation is very difficult.

Doing a short sale seems to be the better choice between the two, but there are many factors to take into consideration before you can decide. However, your credit score is probably the most important factor, so choosing to do a short sale over walking away from your home is probably the best option in most situations.

Making a Larger Down Payment: Is It Worth It?

Making a Larger Down Payment-Is It Worth It- 150x150If you are getting ready to purchase a home, you are probably wondering how much of a down payment you should make and how it will affect your budget. Deciding how much to put down can be a tough decision, because the size of the down payment will have an influence over your mortgage. Making a larger down payment is usually beneficial, if you can afford it, but it also has a few downsides. However, making a down payment that is too small will attract extra costs, such as a higher interest rate or the requirement to pay Private Mortgage Insurance (PMI).

The Advantages of Making a Larger Down Payment

Generally, unless you can invest the money that you are going to use as a down payment somewhere else, making a larger down payment can actually save you money in the long run. Your monthly mortgage payments will be lower, the interest rate that you will be paying will be lower, you’ll avoid paying for Private Mortgage Insurance and have other advantages. Let’s take a look at the most important benefits that making a larger down payment will provide.

  • Lower mortgage payments. The down payment represents a big chunk of the total loan value, so the bigger it is, the smaller the remaining amount will be, meaning that your monthly mortgage payments will also decrease. By lowering the amount left to pay on your mortgage, you save money, because you won’t pay thousands in interest over the years. Lowering your monthly payments also makes your monthly budget higher, allowing you to spend more money on other expenses.
  • Lower interest rate. The higher your loan-to-value ratio is, the more of a risk you will be in the eyes of your lender. Making a larger down payment lowers your loan-to-value ratio and the interest rate that you will have to pay. A lower interest rate means that you will be paying significantly less on your mortgage over time, even if the difference is very small.
  • No Private Mortgage Insurance. Conventional mortgage loans require a 20 percent or more down payment in order to avoid paying for Private Mortgage Insurance. When making a larger down payment, you also save money by not paying a PMI.
  • Less risk of being upside down on your mortgage. If the housing market crashes and you are forced to sell your home, having a mortgage balance that is higher than your home’s value can put you in a very difficult situation. If you have made a larger down payment when you purchased the home, the risk of being put in this situation will be much lower.
  • Build more equity in your home. A larger down payment can help you build more equity in your home much quicker. If you encounter some financial hardships in the future, you can get past them much easier because you will be able to borrow more against the equity in your home.

Larger down payments are usually considered very beneficial, but they also have a few disadvantages. The largest one being that the money used for the down payment can be invested somewhere else, where they will generate a return, or left into a savings account where they will generate interest. Another disadvantage is that, because the interest rate will be lower on your mortgage, you will have less tax deductible payments. A third disadvantage, and a very important one, is that you lose access to an emergency fund if you tap into your savings in order to make a larger down payment.

Whether you decide to make a larger down payment, invest the money, or just keep it for a rainy day, depends entirely on your financial situation and future plans. You could be saving more if you put more money down, but you shouldn’t do it at the expense of financial security.

Do You Need PMI? Not If Your Home is Underwater!

Do You Need PMI-Not If Your Home is Underwater-150x150Sometimes the housing market changes radically and you end up paying mortgage on a home that has lost significant market value since it was purchased. This situation has become very common in the last few years, since the housing bubble burst and the US went into a recession. Many home owners have found themselves having to make the same large monthly payment on a home that is worth much less than before the recession. When this happens, homes become really hard to sell because their value is less than what the owners owe on their mortgages. Because of this, many homes were classified as distressed, creating large financial problems for home owners who wish to sell.

When a home buyer purchases a home and are able to put less than 20 percent down, they are typically required to purchase Private Mortgage Insurance (PMI). This is an attractive alternative for home buyers who don’t want to wait until they save more money to put as a down payment. Being underwater on your mortgage and having to pay Private Mortgage Insurance on top of the high monthly payments makes it very difficult for home owners to keep their home. Abandoning the home and buying another one, which will have a lower monthly payment, seems like a better alternative.

The Homeowners Protection Act of 1998 states that Private Mortgage Insurance can be canceled when you reach 20 percent equity in your home. When the equity in your home reaches 22 percent, PMI should be dropped automatically, but many times lenders don’t remove the policy until they are reminded. Unfortunately, many home owners don’t know this. If you are underwater on your mortgage, you can have your PMI canceled.

Qualifying to Have Your PMI Canceled

Even if your home is worth less than when you purchased it and you owe more on your mortgage than the home is currently worth, you can still have the Private Mortgage Insurance canceled. There are, however, a few qualification guidelines that you should be aware of:

  • The equity in your home has to be 20 percent or larger.
  • Your monthly mortgage payments must be up to date, with no missed payments.
  • Sometimes it is required that you don’t have any late mortgage payments for the last 6 months.
  • You must have been the owner of the home for at least 2 years.
  • There must not be any second liens on your property, such as a home equity loan or a second mortgage.
  • The property must not be a vacation home.

Even if the law states that the Private Mortgage Insurance must be canceled once the equity in your home reaches 22 percent, be prepared to have a difficult time getting your lender to actually do it. You have to send them several documents related to your mortgage and a letter requesting the cancellation. Your lender has all of this information already, so this is done mostly to prove to them that you are an informed customer.

Being underwater on your mortgage is hard enough without having to pay Private Mortgage Insurance, as well. Having to make the same payments on a home that is now worth significantly less than it did at the time of purchase might not make a lot of sense, unless it’s your dream home and you have become emotionally attached to it. Fortunately, by canceling your Private Mortgage Insurance you can free up some much needed cash, which will certainly make your life easier.

 

Divorcing and Have an Underwater Mortgage? Options Here!

Divorcing and Have an Underwater Mortgage-Here's What to Do- 150x150Divorce is an unfortunate situation to be in, and you probably want to get it over with as soon as possible. Unfortunately, if there’s also a home with an underwater mortgage involved, things can get even messier. Statistics say that around 50 percent of all marriages in the United States end in divorce, and more than 20 percent of all homes are underwater, so divorcing when you have an underwater mortgage is a pretty widespread problem.

Normally, when a couple divorces, the home is either sold and the money split evenly, or one of the spouses keeps the house and the equity in it will count toward their share of the assets. This is what happens when there is equity in the home, meaning that the home is worth more than when it was purchased. In case of an underwater mortgage, the home is worth less than when it was purchased, and the home has negative equity. This means that the home is not an asset anymore, but a liability, and it is much harder to decide who gets the home or how the debt will be split. Here are some solutions to divorcing when you have an underwater mortgage.

Refinancing

Refinancing is expensive and there’s a chance that you will be denied in your situation, but, thanks to government programs, such as the Home Affordable Refinance Program (HARP), you still have a chance to refinance your home, even if your mortgage is underwater. The best way to take advantage of this program is to refinance the mortgage under the name of only one of the spouses, then making changes to other aspects of the divorce in order to reflect the financial liability that the spouse who is refinancing is taking.

Lenders are reticent when it comes to refinancing if one of the borrowers is taken off the mortgage, even if it’s through the Home Affordable Refinance Program. You will have to make sure that the spouse who refinances has enough income to continue paying the mortgage by himself or herself.

Foreclosure

This is the easiest way of dealing with an underwater mortgage when divorcing, but it’s also the solution that will leave the biggest black spot on your credit report. Typically, a foreclosure will stay on your credit report for up to 7 years, making it hard for you to get another mortgage loan. The foreclosure process also takes a long time, which means that it will take that much longer to repair your credit score.

If you remarry after your divorce, and your new spouse has a good credit score, you could get a new home using their credit, but you will most likely be unable to contribute to paying the mortgage with your income.

Short Sale

In order to sell your home for less than what you owe on your mortgage, you will have to convince the lender to allow a short sale. Lenders usually agree to a short sale when it is clear that the borrower is unable to keep making mortgage payments, which may be the case if the income from both spouses was used to make mortgage payments.

The lender might not agree to a short sale, and hold both spouses liable even if they are divorced. Also, a short sale will have a significant negative impact on both of your credit scores, and it will most likely take several years until you will be able to recover from this hit and have a good credit score again.

Deed in Lieu of Foreclosure

Another option would be to simply return the home to the lender, if they agree. You lose the home, but won’t be held liable, like you would with a short sale. This is a win-win situation, because your credit score won’t take such a big hit from a deed in lieu of foreclosure, and your lender avoids the high cost of foreclosing your home.

Another option would be to continue living in the same home with your spouse while still divorcing. This is often a bad idea for both parties involved, but if you can pull it off until you can refinance or sell your home without losing money, then you should take it into consideration. Divorce is a bad experience, and adding an underwater mortgage to that will make it even more of a mess, but there are ways of dealing with this situation that will help keep more money in your pocket.

Walking Away from Your Mortgage: The Consequences

Walking Away from Your Mortgage- The Consequences- 150x150Financial strain from the recent economic crisis, an illness, a job loss, or even divorce can lead to foreclosure. Millions of Americans have lost their homes to foreclosure over the past few years, and it’s never a pleasant experience. Losing a home can be very discouraging, and even depressing. However, there are some who choose to walk away from a mortgage on their own, even when they are able to make the payments. This comes with some serious repercussions, but it’s sometimes a better choice than keep making mortgage payments.

When Does It Make Sense to Walk Away from Your Mortgage?

Even if some consider walking away from your mortgage morally wrong, making those large monthly payments after home prices have dropped significantly makes many home owners wonder if maybe they should just stop paying their mortgage. Their properties are worth much less than when they took out their mortgage loan, but monthly payments have remained the same.

Generally, home owners who are considering walking away from their mortgage, also known as strategic default, are people with a good credit score who can afford to keep making payments on their mortgage, but decide to stop from a business point of view. Their home becomes a bad investment, so walking away from their mortgage seems like a better choice. This choice, however, comes with a few negatives, which may outweigh the pros, depending on each individual’s financial situation.

Consequences of Walking Away From Your Mortgage

Strategic default may sound like a good idea, but there are some things to keep in mind before going down that route. Here are the most important consequences of walking away from your mortgage:

  • Your credit score will drop significantly. Whether the foreclosure on your home is voluntary or not, your credit score will be deeply affected. The default will remain on your credit report for up to 7 years and will interfere with your chance of getting another mortgage loan, making it near impossible. An alternative to strategic default would be a short-sale, which won’t do as much damage to your credit score. Dealing with a low credit score can be difficult, as it might interfere with your ability to rent a home or to make other large expenditures that require credit checks.
  • Your taxes will still be due. The Internal Revenue Service will view your unpaid debt as income and expect you to still pay taxes on it. Depending on when you defaulted, you may be covered by the Mortgage Forgiveness Debt Relief Act of 2007, which protects you from federal taxes after your strategic default. However, other taxes, such as state taxes, may still have to be paid.
  • You could be liable for a deficiency judgment. When your home is foreclosed on, the amount owed will usually be larger than the foreclosure sale price. The difference between the two is called a deficiency and, depending on your state laws, your lender may sue you to recover that difference.

Planning ahead before deciding to walk away from your mortgage is essential if you don’t wish to encounter some serious problems in the future. Many people who choose to do a strategic default open high credit card accounts, or buy another home before letting go of their current home. Living with damaged credit will be hard, so taking some precautions before walking away from your mortgage will save you some trouble.

Walking away from your mortgage can have serious consequences, like destroying your credit score, not being able to obtain a new mortgage loan, or being sued by your lender. Before considering a strategic default, make sure that you are fully aware of how this will affect you and your financial situation. If you decide that this is your best option, then carefully plan ahead so you don’t encounter any major issues down the road.

How HARP 3.0 Could Help with Underwater Mortgages

HARP 3.0- 150x150Originally, the Home Affordable Refinance Program (HARP) was created to help responsible homeowners that were current on their mortgages but owed more than the market value of their homes. With the next installment, HARP 2.0 waived the loan-to-value requirements and provided more affordable mortgage refinancing solutions to more than one million U.S. households. HARP 3.0, which has been introduced as a bill but has not passed as of yet, would allow all homeowners whose mortgages are not backed by Freddie Mac or Fannie Mae to refinance their underwater properties. The new and improved program would offer much needed assistance to more homeowners than previous installments of the HARP program.

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Homeowners Who Would Benefit from HARP 3.0

  • A self-employed homeowner who borrowed their original mortgage from their stated income but now wants to verify their income through federal tax returns
  • A jumbo mortgage homeowner who lives in a high-cost area and whose original mortgage was anywhere between $417,000 and $625,000
  • A subprime borrower who has responsibly met their current mortgage terms and can accurately verify all of their income and assets
  • A wage earner who used their stated income or stated asset mortgage for convenience reasons
  • A prime borrower who used a subprime mortgage because it was relatively cheaper in comparison to a conforming mortgage
  • An Alt-A borrower who has tremendously improved their low FICO scores from the mortgage origination date

Proposed Changes to HARP Program with HARP 3.0

  • Eliminating all upfront fees and appraisal costs
  • Improving the marketplace competition since it requires the same underwriting standards for both servicers and non-servicers
  • Penalizing mortgage insurance providers and second lien holders who try to prevent homeowners from refinancing their first mortgages
  • Streamlining the refinance process by removing the requirement of providing employment or income documentation
  • Extending the streamlined refinancing provided under HARP 2.0 to GSE borrowers having loans that took effect prior to June 1, 2010. This is an improvement from the HARP 2.0 eligibility guidelines that restricts borrowers with Freddie Mac or Fannie Mae loans closed before June 1, 2009

Improvements to HARP Program

  • Lower monthly repayments. HARP 3.0 calls for lower mortgage rates for borrowers- under the 4 percent rate that reigned in 2012. Households would save around 30 to 40 percent through mortgage refinancing at these lower rates. When announcing the program in January of last year, President Obama also said that it would enable homeowners to save about $250 per month on the principal.
  • Ease in refinancing. The program would eliminate the tendency of some lenders denying borrowers of nonconventional loans for refinance plans. President Obama pushed for new guidelines before his reelection that would enable a homeowner with an underwater mortgage to modify their loan program in order to suit their financial situation.
  • Fewer requirements to qualify. Any underwater homeowner who is current on their existing mortgage with no other residential property could choose between a 30-year fixed rate mortgage at 5 percent and a 15-year fixed rate mortgage at 4 percent. All types of loans qualify. It does not have to be secured by Freddie Mac or Fannie Mae, nor does it have to be originated before May 31, 2009.
  • Fewer foreclosures. Underwater homeowners risk foreclosure in their current mortgage programs. However, HARP 3.0 would loosen the grip of those programs, thus enabling more homeowners to qualify. This would also reduce the number of foreclosures and stimulate growth in the economy.

The bill was presented to no avail in 2012, but was reintroduced by Democratic senators in early 2013. With significant support from housing and related industry heavyweights like National Association of Home Builders and Mortgage Bankers Association, as well as a Democratic-controlled Senate, the bill has a very good chance of moving forward.

An Overview of The Obama Government Refinance Program

MHA_Vert_LogoSM1-150x150President Obama is the first to admit that his earlier attempts at providing housing relief have been less than successful, but he hopes this proposal will have the desired impact for individual Americans, and the economy as a whole. The goals of the proposal, known as MHA (Making Home Affordable), focus on preventing foreclosures on people’s homes, stabilizing the nation’s housing market, and improving the country’s economy. Read on to learn about this program and see about its chances of passing legislation.

The Politics of Foreclosure

For individual consumers and homeowners, the issue of housing relief is concrete and personal. People facing the loss of their family homes have little patience for the rhetoric and wrangling of politicians. For many politicians (whose own homes are secure), the matter  is more abstract—less a humanitarian issue than an opportunity to air sound bytes to replay at re-election time.

Mitt Romney, the governor of Massachusetts and recent presidential candidate, went so far as to recommend that the record-breaking foreclosure rate should be left alone to “run its course and hit the bottom.” Obama countered with the argument that it is morally irresponsible to stand by and let “struggling, responsible homeowners” bear the brunt of the nation’s economic crisis. For these individuals, the stakes are too high.

The number of individuals facing crisis are staggering. The rate of foreclosure in this country have never been this high. One quarter of Americans with mortgages (approximately eleven million all told) now owe more than the homes are currently worth, a situation known as “being underwater.”

At the same time, most banks are hesitant to offer refinancing to people whose homes are underwater. Thirty million mortgages—approximately half of all home loans in the United States—are held by non-government lenders who are not refinancing underwater homeowners.

The Proposed Legislation

If Obama’s plan passes the legislature, eligible homeowners would be given the option of refinancing mortgages through the Federal Housing Administration (FHA). The FHA itself would guarantee the refinancing loans, and the program would be funded by fees imposed on the large banks that are currently refusing to refinance risky home loans.

Many of the home loans that are now in trouble resulted from complaisant screening policies by those same banks which approved loans for consumers without even demanding proof of income sufficient to make the loan payments.

Challenges and Down Sides to the Legislation

This proposal comes with a ten billion dollar price tag, and Obama essentially intends to send the bill to the nation’s biggest banks. A fee imposed on large banks would cover the cost, but even Democrats have vetoed this approach in the past, so getting this legislation passed is likely to be rough going.

If the legislation were to pass, its impact will be limited in scope. It does not apply to those consumers who are most in danger of foreclosure: those who have borrowed money and fallen behind on the mortgage payments. To qualify for the program, a homeowner must have stayed current on the last six months’ payments, and missed no more than one payment in the previous six months.