It is estimated that 60 percent of homes in America are “underwater”, or hold mortgage loans that are more than what the home is worth. While having an underwater home is not a desired position to be in, it generally isn’t a problem unless payments are missed or the home becomes at risk of foreclosure. When financial trouble arises, homeowners of underwater homes face additional challenges in resolving their mortgage debts.
A Sinking Ship
The biggest obstacle homeowners of an underwater home face is obtaining approval from a lender to resolve mortgage debts. When the home loses value, the lender gains increased risk. Although neither the lender nor the homeowner benefit from a foreclosure, approving a loan modification on or refinancing an underwater home could be too risky for the lender. Already losing money by way of missed payments, approving a loan modification to lower payments only cuts further in the potential profits of the lender.
A Life Raft
However, not all hope is lost. Underwater homes may still qualify for a mortgage modification, but are generally more successful if sought prior to missed payments or delinquency. If a lender is hesitant to approve a modification, a short sale is another option. Already set to be sold for less than what is owed, the home can generally be sold for at least fair market value and resolve the remaining risk of further loss for the lender. The government also operates several programs to assist underwater homeowners, such as the Home Affordable Foreclosure Alternative and Home Affordable Modification Program.