Statistics for the first quarter of 2013 note that 13 million households, or 25.4 percent of all homeowners with a mortgage, are underwater, owing more on their mortgage than their home is worth. A further 18.2 percent have insufficient equity to afford to move. That means almost half of all homeowners are tied to their current homes. If you're one of them, the prospect of a new home might look bleak, but there are still a few options to consider.
If you can convince your lender to accept lesser sales proceeds than you owe in full settlement of your mortgage loan, you have a "short sale." Banks take some persuading before they will agree to a short sale. To qualify, a borrower must prove financial hardship and a need to sell. Need is not the same as want, and simply desiring a new home is not enough. You must be unable to service your loan. Some banks won't let you short sell unless you've already defaulted. Be warned that defaulting will impact your credit score, which might block your attempts to get a new mortgage on another home for several years.
Rent Your Home
If you qualify financially for both your existing mortgage and a new one on a second property, you can rent out your current home and purchase a new one. While qualification criteria vary among lenders, if you are lucky enough to have 30 percent equity in your current home, you can include the rental income on your mortgage application. According to Renting My House, some lenders require borrowers to have cash reserves sufficient to pay both mortgages for six to 12 months. Typically you must secure a tenant before you apply for your second mortgage. Your lender will request a copy of the lease and evidence that the tenant has moved in.
Buy and Bail
If you are desperate, you might consider "buying and bailing." This happens when a homeowner caught in negative equity purchases a new home, typically by claiming that he is renting out his first home, and stops servicing the first loan after closing on the second, forcing his first house into foreclosure. As morally dubious as this is, there's nothing to stop a homeowner performing a buy and bail -- unless he's committing mortgage fraud. It is a federal offense to lie on a loan application. Claiming the existence of a nonexistent tenant, or otherwise making false statements about income, assets or debt can earn the borrower a jail stint, a fine, or both. It's also worth remembering that in some states the lender can come after you for the deficiency on your foreclosed property, and your credit score will inevitably suffer.
Take the Hit
Being underwater does not rule out buying a new home. If you have savings and are prepared to cut your losses, you could sell your home at a loss, make good the loan to your bank with your savings, and buy a new home. This might take a serious injection of cash, depending on your negative equity deficit. That's the downside. On the upside, you pay off your loan, your credit score suffers no damage and you get your new home. It's a bitter pill to swallow, but if you have the funds, it might just be worth it.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.