Short Sale Alternative for Homes Worth Less Than the Mortgage

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A reader asks: "We bought our house one day before the market crashed. We put zero down and pay interest only on our loans. We can afford to pay our mortgages, both my husband and I have outstanding credit ratings. We tried working with a loan modification company, but that failed miserably when the company disappeared with our money. We love our neighborhood and would like to be able to make the improvements that our house desperately needs, but don't want to keep throwing money at a problem that may never get better in our lifetimes. Is there a short sale alternative for us?"

Answer: Being upside down in your home is a heartache. It's almost as though there is a monkey on your back, and he won't get off. But there aren't any 12-step programs for sellers who owe more than their homes are worth. Here are my top 10 Short Sale Alternatives that you might want to consider if you decide that a traditional short sale is not for you:

Alternative to Short Sale Option #1

Continue to make your mortgage payments. Wait, is that an option? Yes, it is, even though it is an obvious solution, not everybody considers it. Sometimes, the first place an owner jumps to is dumping the house.

If you can afford to make your payments, why don't you stay put and pay your mortgage? If you're not selling your home now, does it really matter how much it is worth? If your loan was sustainable when you took it out, and you can still afford to pay it, you do have the option of continuing to pay your mortgage and staying where you presently live. It's simply a matter of attitude and willingness to pay.

Alternative to Short Sale Option #2

Walk away from your home. This doesn't necessarily mean that you pack up your bags in the middle of the night, back up a moving truck to your front door and skip town before the neighbors notice you are gone.

It means you stop paying the mortgage. Maybe you ask about cash for keys. But you let the home go into foreclosure without trying to save it. For some sellers without recourse loans, walking away might not carry any liability except for the social and financial stigma of foreclosure.

Alternative to Short Sale Option #3

Payoff the mortgage. If you don't want to move and you have access to enough money to pay off your mortgage, consider doing so. Some people feel that when they make a promise to pay, the security for the loan is immaterial and the promise to pay is paramount.

You won't feel so badly about how much your home is presently worth if you don't have a mortgage on it.

Alternative to Short Sale Option #4

Refinance your mortgage through a government refinance program. Some refinance programs, such as HARP, allow you to refinance the entire mortgage, providing your loan is Fannie Mae or Freddie Mac. Other programs allow for a refinance up to a certain loan-to-value percentage.

Bear in mind that while you might substantially lower your payment, you are also extending the term of your loan.

Alternative to Short Sale Option #5

Consider a loan modification. I know you tried that through a loan modification company, but loan mod companies don't really do anything that you can't do for yourself, and some might even harm you. It's worth it to talk with your bank about a possible option for a loan modification.

The best of all worlds would be to get a program that reduces your principal balance, but I'm sorry to say that will probably happen when pigs fly.

Alternative to Short Sale Option #6

Ask your bank for a note modification. This is different from a loan modification but is similar. You are asking the bank to modify the terms of your note. Perhaps the bank would be willing to lower the interest rate on your loan, without a refinance and retain all the other terms, without submitting piles of paperwork. It's a simple solution.

Alternative to Short Sale Option #7

Buy a new home and rent out your existing home. This is different from Buy and Bail. Some fortunate homeowners can qualify to own two homes at the same time. Typically, the bank will require reserves equal to 6 months of payments for each home.

If you can make the exiting home cash flow from a rental standpoint, all the better.

Alternative to Short Sale Option #8

Buy and Bail. Although this is not an option I endorse, it is an available option that sellers choose. It doesn't mean that if your bank can prove a Buy and Bail intent, that the FBI might not be able to build a case for mortgage fraud.

Some homeowners buy another home with the intention of renting out the existing home and then discover they cannot sustain the rental. Maybe the tenants stop paying or they can't rent the home and continue to make payments on a vacant house, which ultimately drains all of their resources. Is this Buy and Bail? Ask a lawyer.

Alternative to Short Sale Option #9

Sell the home with owner financing. You might ask who would overpay for a home by buying an underwater home? Lots of people. They do it all the time through lease option purchases and lease option sales. Some of these transactions bet on future value, and that can lead to overpayment as well.

Just try to get some kind of money upfront so you have a little security that the new owners will continue to pay. You will depend on the buyers to pay so you can pay your own mortgage. Get legal advice if you go this route because most existing mortgages contain an alienation clause.

Alternative to Short Sale Option #10

Pay the bank to do a short sale. With the exception of SB 458 in California, many lenders who might be opposed to a traditional short sale will accept a short sale in which the seller contributes to the bank's loss.

Some banks might accept 10 cents on the dollar or less. It's called a strategic short sale and doesn't necessarily involve a financial hardship.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.