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Articles for Baby Boomers

Upside Down Baby Boomer Home Owners Face

Tough Choices. What are the Alternatives?

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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