The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
Feel like you are drowning under your mortgage? Millions of Americans are “underwater” on their home loan, meaning that they owe more than the home is worth. Here are six options for dealing with an upside down mortgage:
Key Questions:
Is budget so tight that you are at risk of defaulting if anything goes wrong? How long will it take to return to positive equity?
Tax Consequences: None
Credit Damage: None
Related Article: Underwater on Your Home? Option 1: Stay and Pay
Key Questions:
Will the refi lower payments enough to make your home affordable, or put you in a stable loan long-term?
Tax Consequences: None
Credit Damage: None
Related Article: Underwater on Your Home? Option 2: Refinance
Lenders may be willing to modify your loan to reduce the interest rate, extend the term or even reduce principal. But many borrowers report extreme frustration trying to get a loan mod approved. And successful loan modifications usually involve a reduction in the principal loan balance, but those are few and far between.
Key Questions:
Does modified loan offer a long-term solution or just a temporary fix?
Tax Consequences: May owe taxes if principal is reduced.
Credit Damage: May be severe but temporary since negative notations are often removed when modification becomes permanent.
Related Article: Underwater on Your Home? Option 3: Loan Modification
Key Questions:
Will you be responsible for a deficiency and/or taxes on the forgiven debt? If so, you may need to file for bankruptcy.
Tax Consequences: May owe taxes if principal is forgiven.
Credit Damage: Will likely be severe and equivalent to foreclosure.
Related Article: Underwater on Your Home? Option 4: Short Sale
Key Questions:
After foreclosure, will you be responsible for a deficiency (common with recourse loans) or be able to truly walk away (non-recourse loans)?
Will you owe taxes?
Tax Consequences: May owe taxes if home is worth less than amount owed.
Credit Damage: Will likely be severe. If sued for a deficiency, the judgment can be reported separately.
Related Article: Underwater on Your Home? Option 5: Walk Away / Foreclosure
Key Questions:
Can it help you reduce or eliminate an underwater home equity loan? Is the mortgage affordable in the long run or is it better to truly walk away and get a fresh start?
Tax Consequences: No taxes due on debts discharged in bankruptcy.
Credit Damage: Severe.
Related Article: Underwater on Your Home? Option 6: Bankruptcy
Special thanks to Credit.com team members Gerri Detweiler and Brad Jerger for their hard work in making this infographic possible.
December 13, 2023
Mortgages