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Baby
Boomer homeowners who are “upside down” in their mortgages
face tough choices. Their home equity evaporated when the
recession hit, and now they owe more on the property than it
is worth. Perhaps they have lost their jobs too. Probably
their savings have been reduced. They look around the
neighborhood and see that properties similar to theirs are
selling at two-thirds or even less of their mortgage amount.
What action should they take? What are their alternatives?
This is not an unusual situation. The percentage of Baby
Boomer homeowners who are upside down on their mortgages
varies by area, but is as high as fifty percent in some
locations. Moreover, millions of homeowners have lost their
jobs or suffered a medical setback that aggravates the
effects of the recession.
So what choices do upside-down Baby Boomer homeowners have?
Quite a few as it turns out and all have consequences. For
those who find themselves in this position, here are the
major alternatives:
1. Do nothing. If you can afford it or if your loan
balance is really low, continue to make your house payments
and hope the real estate market bounces back. Just be sure
to research the expected appreciation (or further decline)
in home values within your local community. Some areas in
California, Nevada, Arizona and Florida, for example, may
take up to ten years or more to recover home values to
pre-recession levels. But if you love your home and have the
financial means (or a low loan balance), this may not a
problem.
2. Rent your home out. If it can’t be sold, then
perhaps your local rental market will support leasing your
home out for the immediate future, allowing you to rent
another home somewhere else that is more affordable. If you
can get rental payments on your current dwelling that cover
the principal, interest, insurance and taxes, this makes
sense. You may even be able to reap a profit from renting
your home out. Meanwhile, this tactic buys time to last out
the recession and see what happens to the housing market.
After a year or so, with demonstrated rental income under a
written contract, you can even apply for a loan to buy a new
home at today’s discounted value and perhaps in a less
expensive area.
3. Get a loan modification. In some cases where there
are validated extenuating circumstances (job loss, illness,
etc.), lenders may offer to refinance or recast your loan to
reduce payments. The government encourages this through
special programs, but it is voluntary for lenders to
participate. It hasn’t been that successful, depending on
the lender’s policies and preferences. If you want to try
this, you are better off working with an experienced
attorney rather than approaching the lender yourself.
4. Walk away. “Strategic defaults” are becoming more
common as the recession lingers. Some economists even say a
“deed in lieu of” or simply mailing your house keys to the
lender makes the most sense for those that are in dire
financial straits or whose property is hopelessly upside
down with little prospect of ever recovering its former
market value. Why throw good money after bad? Just treat
your home as a bad investment and take the same action big
business and banks do – give it back to the lender! But
realize that this action will negatively impact your credit
and prevent you from obtaining a new home loan for up to
seven years.
5. Let your home go into foreclosure. Actually this
is a good choice for some situations. If you have lost your
job and are experiencing financial difficulties, some
experts advise stopping making house payments and let your
property be foreclosed. In many cases, it can take
one-to-two years for the lender(s) to actually complete the
foreclosure process because they already have a huge
inventory of troubled properties they are dealing with.
Meanwhile, you live rent-free and can save up money to get
back on your feet. Lenders also prefer to have the homeowner
living in the property during this time so that it is
maintained. Your credit score, however, is hit hard by this
action and it will be 5-7 years before you can get another
home loan. But if you don’t have the money, who cares?! And
maybe Congress or one of the major lending agencies (FHA,
etc.) will institute new policies down the road that
“forgive” foreclosures sooner so that the housing market can
expedite recovery.
6. Do a short sale. In this case, the lender(s) must
agree to accept a lesser pay-off on the outstanding loan(s)
on your property. In essence, they acknowledge that the
current market value of your home is less than the amount of
the loan(s) and decide to get what they can out of the deal.
Lenders are becoming more amenable to short sales because it
turns out to be less costly than foreclosing. And some
lenders are instituting policies of responding with
acceptable sale prices within 10 days of inquiry to expedite
what has been a lengthy short sale process. Moreover, home
lending agency policies are now recognizing the need to get
short-sale homeowners back into the housing market sooner,
so after two years former homeowners can now apply again for
home loans. But your credit score will take a hit, with the
magnitude dependent upon how you handle home payments during
the short sale process. And if you have a second mortgage or
home equity loan, be sure to get a written release for the
balance. Otherwise, the second lender can get a deficiency
judgment or sell the loan balance to a collection agency who
will hound you for years! In any case, you will owe taxes on
that portion of the home equity loan not used to directly
upgrade or repair your home.
7. Declare bankruptcy. If things have really piled on
and you are in a financial mess, declaring bankruptcy is
probably the best way to go. Just remember, you have to
prove your inability to regain solvency without a new
financial start. But bankruptcy is a much better alternative
than attempting to stay afloat on an upside-down home or
doing a short sale where bill collectors (and perhaps the
IRS) may still pursue you afterwards.
Note that the federal government has instituted mortgage
relief laws so that you don’t get hit with a huge tax burden
if your home goes into foreclosure or experiences a short
sale. Many states have done the same for state taxes.
However, these only apply to the first mortgage. Seconds and
home equity loans present a trickier tax situation that can
result in a nasty surprise once a foreclosure or short sale
transaction is completed.
Each alternative requires careful research and evaluation
before taking action. Boomers are encouraged to explore
their options with knowledgeable real estate agents,
mortgage lenders, CPAs or attorneys before doing anything.
Confirm feasible options for your unique situation and
possible ramifications. It is recommended, however, that you
do not approach your lender(s) first, as this may set off
unforeseen consequences.
Finally, upside-down homeowners pursuing any alternative
experience stress and emotional pressure. It is advisable to
take a long-term perspective and formulate a “life plan” to
implement after the current unpleasant situation is
resolved. Getting through difficult times is easier if you
have something to look forward to.
About The Author
Al Kernek is a Internet marketing consultant, author and Baby Boomer. Learn more about issues facing Baby Boomers seeking to retire on a
limited or fixed income at
www.BabyBoomerLifeboat.com which is also an online portal to Websites containing valuable information and resources for Baby Boomers.
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