So your mortgage is upside down and you are struggling to make payments. If you could only hold on until property values come back up. Maybe you have it under control right now but there is an adjustment on the horizon or a balloon payment coming up or there may be some point in the future when you don't know how you will keep up. What if you miss a payment and trigger an adjustment to your ARM? What will you do then? What can you do? You may have had these thoughts while you helplessly watched your mortgage turn upside down as your property value plunged.
Now is the time to do something. Take action before your credit is ruined, but if you are already behind on your mortgage payments, take action before your lender does. You have options now that you won't when it is too late.
Why can't I refinance a mortgage for an upside down property?
As you go upside down on a mortgage, refinancing becomes risky for a lender. From the lenders point of view, they give you a loan and turn around to sell your mortgage on the secondary market. The investor who bought your mortgage now has the risk, the lender has the money back and gets paid for servicing the loan. You deal with the lender but an investor now owns your mortgage.
The lender makes income from creating a mortgage, servicing the loan and repeating the process over and over with the same money. Once the home mortgage goes upside down the investor is at risk of losing money. He wants you to get refinanced by a new loan. He gets his investment back, makes a profit and gets out of an unsecured investment.
The problem is why would another investor buy a mortgage for an upside down property. The investor would be exposed to unsecured risk for a low interest rate. With a high interest rate he might be willing to take that risk, but then why would you want to refinance to a higher interest rate and larger monthly payment.
Let's say a lender refinances even though you are upside down on your mortgage. He gives you a lower interest rate and monthly payment. The lender turns to the secondary market to sell your upside down mortgage. Who is going to buy it? I wouldn't. Would you? If your loan to value is negative by $100k, that is like paying $450k for a $350k house. A professional investor will pass.
The lender is in the business of writing mortgages, selling them, servicing them and making a profit on the same money repeatedly. If they can not sell your mortgage, they will turn it down. That is the brutal reality of an upside down mortgage.
What About Government Home Loan Help?
The government has not come up with enough incentive for an investor to take that much unsecured risk for little return. Until the government comes up with enough incentive or takes away the unsecured risk, investors will not buy these loans.
There is an option to refinancing that is working, home mortgage loan modification or forbearance (even when you are not behind on payments). Technically they are different.
A home mortgage loan modification is a permanent change of the mortgage contract. Usually from adjustable to fixed interest rate or possibly to a lower interest rate or the term of the loan may be extended to lower monthly payments. A permanent change to a lower interest rate and monthly payment does happen but it is a tough sell.
Again look at it from the lender and investor view point. Financially the lender is not significantly affected as they already sold the loan and will continue to service it. The investor takes a bigger hit but not as much as he would for a principle reduction, short sale or foreclosure. The investor does not make as much money but does not lose all his investment.
Forbearance in this instance is a temporary mortgage rate reduction, lowering mortgage interest rate and lowering monthly mortgage payments for a period of time. At the end of that period the loan reverts to the original terms of the mortgage contract. This is the most commonly approved of the residential mortgage solutions.
Look at forbearance from the investors prospective. The investor takes less money for a number of years. The investment is not being paid back but he is getting some money. After the reduction period the investment continues at the original terms he purchased. Much better than losing his investment and the original investment stays intact. For the investor this is the best of the residential mortgage solutions.
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