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How to Get Rid of an Underwater Mortgage

by Don Rafner, studioD

No one wants to be underwater on a mortgage loan, meaning you owe more on your loan than what your home is worth. This can cause problems when you're trying to sell your home or refinance it. If you want to sell your home, you'll have to charge less than what you owe, taking a loss. When you refinance, most lenders require you to have a certain amount of equity in your home -- something you won't have if you're loan is underwater. Fortunately, you can take steps to get rid of that underwater mortgage.

Call your mortgage lender and ask if it is willing to reduce the principal balance of your mortgage loan. You might have more leverage if you're actually suffering a financial hardship. One of the ways lenders can do this is by reducing a loan's principal balance, something that might -- if the balance is reduced by a large enough amount -- move you out of underwater status. You'll need to meet the lender's requirements, which could including, among other things, providing sufficient information to prove that you are suffering a financial hardship.

Ask your lender if it participates in the Federal Housing Administration Short Refinance Program. This program, part of the federal government's Making Home Affordable suite of homeowner relief programs, allows homeowners whose homes have fallen in value to refinance to a new mortgage loan insured by the FHA. As part of the process, the new loan can be no more than 97.75 percent of your home's current market value, so you will have to reduce the loan balance to achieve this level of financing. To qualify, you will have to meet certain requirements, such as your current mortgage loan must not be owned or guaranteed by Freddie Mac, Fannie Mae, the U.S. Department of Veterans Affairs, FHA or U.S. Department of Agriculture.

Ask your lender if you can sell your home through a short sale if it will not work with you to reduce the principal balance of your mortgage loan. In a short sale, your lender allows you to sell your home for less than what you owe on your mortgage. The lender covers the resulting loss. If you owe $200,000 and sell your home for $180,000, the lender will absorb the $20,000 loss. Short sales, though, can prove challenging. Even if you accept a buyer's offer, your lender must also approve it. If your lender denies the offer, your home will stay on the market. Most lenders will only approve short sales if you can prove, through copies of such documents as your bank account statements, tax-return statements, credit-card bills and paycheck stubs, that you can no longer afford your monthly mortgage payments.

Ask your lender for a deed in lieu of foreclosure. In this arrangement, homeowners who can no longer afford their monthly mortgage payments voluntarily give ownership of their home to their mortgage lender. Homeowners are usually not financially responsible for any loss that the lender incurs by accepting a deed in lieu of. Lenders will require that homeowners prove -- through copies of their bank statements, credit-card bills and paycheck stubs -- that they are suffering a financial hardship before they approve a deed in lieu of foreclosure.

Sell your house for a loss and pay the balance due, if you can't find any other way to get rid of your underwater home loan. For instance, if you sell your home for $180,000 but you owe $190,000 on it, you'll owe $10,000 to your mortgage lender, which will be due at the sale closing.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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