My home is underwater. What are my options?

If you have purchased a home in Connecticut in last 10 years, there’s a very good chance that your home is underwater.

A Home is underwater when it is worth less than the balance owed to the mortgage company. Sometimes this is also referred to as being upside down.

As long as you plan to stay in your home, it may not matter if your home is worth less than you owe.

However if you plan to sell your home, then it matters a lot.

Selling a home that is underwater requires the bank to agree to accept less than you owe them.
This is called a short sale.

If you are able and willing to pay the difference between the mortgage balance and the sales price, then you do not need to do a short sale. This option is best for your credit score.

Most people who do a short sale have fallen behind with their mortgage payments. If you are up to date with your payments it is less likely that the mortgage company will forgive a large portion of your mortgage debt.

In general, you will have more options to deal with your underwater home if the mortgage is delinquent. The loss mitigation department of your mortgage company will tell you that your options are (1) doing a short sale; (2) trying to modify your loan; (3) or giving the mortgage company a Deed in Lieu of Foreclosure. If your mortgage is up-to-date you may not get to speak with the loss mitigation department at all. The option that the loss mitigation department will not discuss with you is to let them foreclose, file bankruptcy and then move. This usually takes at least a year or more in Connecticut.

If your short sale is approved and the bank forgives a portion of your mortgage debt, you may have another problem when it comes time to file your tax return. Up until a few years ago, there was a law that said that the forgiven debt on the short sale was not taxable as income under certain circumstances. Unfortunately, that law has expired and you will now have to declare the portion of the debt that was forgiven as income on your tax return.

There are a few exceptions to that rule.

One exception is if you are insolvent. Insolvent means the total value of your assets is less than your total debt.

Another exception is if you have filed a Chapter 7 bankruptcy, the forgiven debt will be considered discharged and, therefore, will not be treated as income on your tax return.

I have also seen mortgage companies modify mortgages and forgive or defer large portions of the mortgage debt.

If you decide to keep your underwater home or even rent it out to a tenant, a modification may be a good option.

You should consult with an accountant before listing your underwater home with a realtor.

Always seek legal counsel before agreeing to a short sale.

You should also consider your bankruptcy options before making any decisions.