When a loan is termed “Underwater” that means the loan amount you owe is higher than the value of the home.
Although we have seen a steady rise in home prices in California It is still possible for homeowners to be underwater.
This is especially true for homeowners who received negative amortization loans prior to 2008. That means the homeowners have options to pay less monthly than the interest that is due on the mortgage. This payment shortage would be added into the outstanding loan balance, potentially putting the homeowner underwater.
Other less severe items can keep you closer to the waterline as well… things like mortgage insurance/PMI, high rates or long term variable interest rates.
When one finds themselves in a loan that is not working out for them action needs to be taken to correct it. Though the process may be a little tricky, the result is usually worth the trouble.
Refinance
Generally it is best to refinance a loan into one with better terms. Advantages of refinancing can include longer or shorter terms switching to a fixed or variable rate and eliminating costly parts from the old loan like mortgage insurance or PMI.
Refinancing is usually the best option, but requires a steady income and a decent credit score.
Loan Modifications
Loan modifications can do a number of things; such as reducing your interest rate, extending the length of the term of the loan, or converting your loan from a fixed to a variable rate loan. To be eligible for a loan modification one must have proof that they can’t handle the loan without the modification, complete a trial period with the modification to prove that it works for you, and provide all required documentation to the lender which usually includes at least a proof of income and bank statements.
This works best for those who have less income and have loan terms that can be improved.
Repayment plans
A repayment plan helps you repay your monthly payments if you had missed them earlier. It spreads your late fees over a set time period, which is usually 3 to 6 months, with a portion of the overdue payments added to the end of your normal monthly payments.
This works best for temporary hardships in life, such as job loss or a death in the family, which have caused you to miss payments.
Forbearance agreements
While a loan modification is a permanent adjustment to your monthly payments, a forbearance agreement is a temporary solution to your potential problems. With a forbearance agreement, the lender reduces or suspends the payments for a set amount of time. Unlike a repayment plan, however, a forbearance agreement is agreed upon ahead of time.
This can be a good option if you know far in advance of your needs.
