The Underwater Homeowner's Dilemma:

Should I Stay or Should I go?

One out of three homes in California is worth less than the mortgage. We face tough decisions as we come to grips with the worst recession since the 1930s and the housing market at the center of it. Even though foreclosures destroy credit scores many borrowers are considering walking away from their homes. (A short sale may help, see below) It’s a difficult decision. It’s an upside down world. Confusion, anger and denial prevent many from moving forward.

The blame game doesn’t help the situation. Mortgage lenders, the government and borrowers all bear some responsibility. But that is old news. This article is about being proactive. We need to let go of the past, get our eyes off the rear view mirror and on the road ahead.

If you are struggling to make your mortgage payments, watching your reserves dwindle, maybe even borrowing from family or using credit cards to stay current, you need a plan right now.

There are lots of headlines about loan modifications, but unfortunately they only work for a small percentage of homeowners. Even if you are one of the few who qualify, it may not help. 42% of loan modifications offer less than a 10% payment reduction. Only 10% offer any principal reduction. The exception may be Wachovia. (Contact me for more information on Wachovia)

If your mortgage is more than 125% of the value of your home it is in your best interest to investigate a short sale now. (A short sale means selling for less than what is owed on the mortgage.) If you hang on to the house, you hang on to the debt. It will take you 5 to 10 years of paying that over value debt to get back to zero equity. It makes much more financial sense to push the reset button. Sell short now, rent a home and buy again in two years. You reduce your housing costs immediately. You get rid of the crushing debt. You may be able to buy again in two years. Prices will still be relatively low.

Over the past 2 ½ years I have guided many sellers through successful short sales. I won’t lie. It is a pain. It may take 6 months or more to complete the process, but if you can’t afford to stay it is definitely the way to go. There is a much softer hit to your credit score vs. the whammy of foreclosure, consult tax and legal advisors to verify. You avoid the publicity of your home being sold on the court house steps. You have more control of the timing, allowing a more graceful exit. In some cases, the bank will give you moving expenses. The bottom line is you move forward.

Here’s the plan:

1. Consult expert legal and tax advisors. (Contact me for references)

2. Call me to find out how much your home is worth today.

3. If you owe less than 125% of your homes market value, if you want to stay in the home and if you have income to support a mortgage payment that is 80% of what you pay now, pursue a loan modification with your lender.

4. If you owe more than 125% of your home’s value, have income loss, been denied a loan mod, loan mod isn’t helping enough, job loss, divorce, or medical bills it may be time to consider a short sale. Call me to discuss your personal situation.

5. Avoid foreclosure at all costs!

Caution! Short sales are not for everyone. Seek legal and tax advice before proceeding with any options discussed above.

Next weeks topic: "Anatomy of a Short Sale"

Mike Young is a Realtor, MBA and Broker Associate at Thunderbird Real Estate in Capitola, specializing in listing and selling distressed properties in Santa Cruz and Monterey Counties. For questions or more information go to www.mikeyoungproperties.com or contact Mike directly at (831) 234-1545 or mike@mikeyoungproperties.com