The downturn in the housing market dates back to 2006 at the peak of the real estate bubble. Since then the price of most houses have tumbled from their lofty highs. During the great recession and in the following recovery doldrums, housing prices have fallen further and it is recognized that a great many American’s who bought homes at or near the market peak, along with those who refinanced their home for a variety of reasons, now find themselves in the position of owing more that the house is worth.
Many people who find themselves in this situation wonder what they should do when they own more than the house is worth. There are several options and they are briefly: keep making payments, sell the house via a short-sale agreement or utilize a strategic default. There are pros and cons to each option and each will be presented briefly below.
Stay in the house and keep making payments
While the homeowner may owe more than the house is worth at the present moment, every payment goes to reduce the amount owed and if it is affordable this is an honorable way to conduct personal business. Over time the value of the house will increase and with continued payments that act to reduce the principle there will come a time when the house is worth more than the amount owed. It may never come back to what it was once worth but in the meantime the homeowner has a place to live, their credit is not damaged and with a good credit report if the homeowner needs a loan in the future they will pay less for it because of their good credit standing.
Use a short-sale to dump the house
Selling a house via a short-sale is nothing more than selling the house for less than is owed on it and the lender has agreed to allow the sale. As a general rule, the lender will keep all proceeds from the sale and any remaining money owed may or may not have to be paid to the lender. For those cases where the lender excuses or forgives the remaining loan amount the borrower can expect to have a negative comment on their credit report. For those who are able to pay the remaining amount owed, even if over time, will avoid a negative credit report comment.
The concept behind a strategic default is simply that since the borrower owes more than the house is worth that they make a business decision to walk away from the deal. While many people question the ethical issue behind walking away from the mortgage, the reality is that if continuing to pay the mortgage merely hastens the day when the borrower must declare bankruptcy then there is little point in staying with the mortgage. Some borrowers push the issue and remain in the house and pay nothing toward their mortgage for up to a year while the foreclosure process works its way through the courts while others mail in their keys to the lender and find housing elsewhere.
The right choice for any borrower has to be measured against their own personal situation and the housing market for the area they are in at the time. The right answer is seldom easy and no matter what route is chosen, the consequences must be measured against the potential gain or loss.