Find out Money Girl's 3 smart solutions to come out on top of an underwater mortgage.
Q. "We have a growing family and need to buy a bigger home. However, we owe more on the mortgage than the property is worth right now. What options do we have?"
A. Owing more for something than its market value is called being “underwater” or “upside down” on your loan.
For instance, let’s say your mortgage balance is $200,000, but you can only net $180,000 after all selling expenses. This could be a problem if you need to sell your existing home in order to afford a new one.
However, here are 3 solutions for dealing with an underwater property:
- Pay the difference out-of-pocket. If you have enough savings, use it to pay your lender the loan shortage, which is $20,000 in my example. This allows you to satisfy your debt in full. If this option wouldn’t leave you with enough down payment money to buy another home, consider renting one instead.
- Do a short sale. This is when the lender agrees to take less for your debt than you owe. While this sounds like an easy out, doing a short sale will hurt your credit. It could be difficult to get approved for another mortgage—or you could only qualify at a high interest rate.
- Rent your home. Consider turning your home into an income property that covers your monthly expenses. Then you can use the rental income to help get approved for another mortgage—or to lease your next home, instead of buying one.
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