Upside Down on Your Home? – Here’s Your Playbook

Mortgage and Lending with iLoan - NMLS ID#4474 NMLS 79048

In my home state of Minnesota, Minneapolis and Saint Paul have nearly 39 percent of homeowners under water.   I've had the question, "I'm upside down on my home, what are my options?" so many times that I wanted to prepare a menu of options for people to reference.  This article briefly outlines 9 potential solutions that may serve you well.  The target audience here is not necessarily someone who's in default on their loan but simply one who owes more than the home is worth.

All too often, when one is upside down on their home and/or struggling with their mortgage, they reach out for one to three options that they may have heard about on the news or from a friend.  What homeowners should be doing is seeking the advice of qualified real estate agents, real estate attorneys and a skilled loan officer.  But, . . . before a homeowner picks up the phone, there's a lot of homework to do!  Before one calls the professionals, they'll just be spinning their wheels until the following items are ready:

  1. Know your address.  You may know it to be one thing but for these purposes, your address is whatever tells you it is.  So go to this website, click on "find a zip code" and type your address.  The postal service will then give you the address it has registered for you.  This is the address that Fannie Mae and Freddie Mac use so it would serve you well to do the same.
  2. Collect your financial documents.  Whether you're working with a loan officer on a loan, a Realtor on a short sale or an attorney on a bankruptcy or modification, they'll all need a complete set of your financials.  This includes 09 and 08 tax returns, W2's and 1099's.  If you're self employed, you'll need 2009 and 2008 tax returns from your business.  If you haven't filed your 09's, get it done.  You'll also need copies of your most recent paystub, most recent bank statement, most recent statement on any retirement accounts, and a copy of a mortgage statement on each mortgage you have.  Getting these documents scanned to image documents such as Adobe Reader can really speed things up.
  3. Collect your legal documents.  It would be wise to, at the very least, have a copy of your mortgage note.  If you are planning on meeting with an attorney, it would be much better to have your entire closing package.  This should have been provided to you by the title company that closed your loan.  Again, getting these documents scanned to image documents such as Adobe Reader can really speed things up.
  4. This isn't necessary, but it's wise.  Get a copy of your credit report at (this site is truly free and not a scam).  Knowing the content of your credit will help you write letters of explanation if you're doing a mortgage loan or a hardship letter if you're doing a short sale.

Getting this done is arduous but it will prove invaluable to those you ask for help.  Now you're ready for that menu of options:

  1. Fannie Mae DU Refi Plus - If your loan is owned by Fannie Mae, you may be entitled to refinance up to 125% of your home's value.  You can get a loose idea of what your home is worth at  To see if your home is owned by Fannie Mae, go to and enter your address as it appeared at  If it is owned by Fannie Mae and you owe less than 125% of the value of your home, you may be eligible for this loan.  The rates are slightly higher than normal advertised rates because of pricing add ons but they are close enough to market rates to be a heck of a deal.
  2. LP Open Access - If your loan is owned by Freddie Mac, you may be entitled to refinance up to 125% of your home's value.  You can get a loose idea of what your home is worth at  To see if your home is owned by Freddie Mac, go to and enter your address as it appeared at  If it is owned by Freddie Mac and you owe less than 125% of the value of your home, you may be eligible for this loan.  The rates are slightly higher than normal advertised rates because of pricing add ons but they are close enough to market rates.  This program will not let you finance more than 5 thousand dollars in closing costs and prepaids so if your settlement charges exceed 5 thousand, be prepared to bring cash to closing.
  3. FHA 115% Write Down Refi - This one doesn't have a name yet so I just made that up.  It's a complicated program and I'm not sure how successful it will be.  Essentially, if you're refinancing a non-FHA loan, you'd take a loan out at 97.75% of your home's value.  A balance may be subordinated to the first mortgage thus becoming a 2nd mortgage but that loan may not exceed 115% of the homes value.  For any of this to happen, the existing lender/s must write down their loan balances by at least 10%.  Here is the announcement for this program.  You must be current on your mortgage to qualify for this loan.  A history of late payments will likely disqualify you for this loan.
  4. FHA Short Refi - This one is a little simpler.  Essentially, you get preapproved for a 97.75% loan to value FHA refinance.  This loan will support a certain amount to be paid to your existing lender.  Whatever the loan can't support, assuming you can't come up with the difference in cash, will have to be written off by your existing lender.  You'd be surprised how many lenders are willing to do this (I know I have been).  This was officially permitted by HUD in December of 2009.  You must be current on your mortgage to qualify for this loan.  A history of late payments will likely disqualify you for this loan.
  5. Modification - You do not necessarily have to be in default to get a loan modification.  If you've had any kind of hardship (i.e. involuntary reductions of income or unavoidable increase in expenses that indicates that you might go into default and you feel that you owe so much on your home and at such poor terms that you're losing your incentive to repay, that might be enough to qualify.  Many people have their own opinions on this and I don't assume that mine is the best but I don't recommend contacting your lender directly as a starting point for a modification and I don't recommend calling a pay for hire service either.  I recommend calling 1-888-995-HOPE (4673) to speak with a HUD approved counselor for free.  They will conduct an interview and serve as an initial intermediary between you and your lender.
  6. Chapter 11 Bankruptcy - It's expensive, it's a long and hard process but unlike Chapter 7 and Chapter 13, a judge can order a mortgage modification under a Chapter 11 bankruptcy plan.  It is the most flexible type of bankruptcy and is thus difficult to explain.  Consult an attorney with specific Chapter 11 experience.
  7. Deed in Lieu - This is where the owner of a property deeds the property back to the lender to avoid foreclosure.  Obviously, this only makes sense if you want to get out of the situation quickly and don't want the house anymore.  I highly recommend the assistance of an attorney in this to ensure that the act of deeding in lieu serves as payment in full of your mortgage to prevent both damage to your credit and the potential of deficiency judgments
  8. Short Sale - A short sale is where a homeowner and lender cooperate to sell a home in a situation where more is owed on the home that the house is worth.  The buyer and their Realtor prepare the home for sale and market it and in exchange, the lender writes down the balance of their note to facilitate the sale.   It is less costly that foreclosure so lenders are typically willing to do this.  Often times, with the help of a good Realtor, damage to your credit can be ameliorated.  When choosing your agent, make sure they have a lot of past experience with short sales, are aware of what is changing in short sales and, preferably, they have done short sales that involve your current lender.
  9. Foreclosure - Now I hesitate to even mention this but a fact is a fact.  Foreclosure is an option.  If you're upside down and you can't make your payments, sometimes you just have to let go.  Too many people think the sheriff's sale is the end.  It's just a step in the process.  Although it varies by state, foreclosure is usually a 9 month process.  So, 9 months of living there and then you move out.  It's an ugly option. . . but it's an option.

When we are under stress, we often reach for the first or easiest option that might get us away from the cause of that stress.  In the case of the underwater homeowner, that can be a huge mistake.  Few know how many options they really have and, if these options are weighed carefully, they can learn that with some effort on their part and the help of qualified professionals, they can get away from their problem with a good solution in hand.

Please remember that all four of these loan types are very difficult and consequently, you'll need an excellent loan officer.  Managing your legal risk in a deed in lieu situation or conducting a Chapter 11 requires a seasoned and sophisticated attorney.  Proper execution of a short sale is both a science and an art so, if that's the route you take don't make a quick decision on a Realtor.  Just because they advertise as a short sale expert doesn't make it so.  Choose your professionals wisely, be deliberate in choosing the solution that you want and be organized and you'll find that you're closer to being stress free again than you think.

My heart goes out to you for your situation and, . . . if misery loves company, . . I'm right there with you!

Posted by

Charles Dailey - Branch Manager, Loan Officer, Certified Military Housing Specialist - iLoan - NMLS ID# 79048 -  612.234.7283 -

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Re-Blogged 19 times:

Re-Blogged By Re-Blogged At
  1. Gabe Sanders 04/03/2010 11:07 PM
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Jeffrey Friel
Keller Williams Greater Omaha - Papillion, NE - 517-1614

Thanks for the info.

Apr 04, 2010 11:35 AM #34
Damon Gettier
Damon Gettier & Associates, REALTORS- Roanoke Va Short Sale Expert - Roanoke, VA
Broker/Owner ABRM, GRI, CDPE

Charles, great advice for homeowners in trouble.  Too bad most will not do anything until it is too late.

Apr 04, 2010 02:46 PM #35
Aaron Vaughn, REALTOR© 512-845-4204
eXp Realty - Canyon Lake, TX
My knowledge is your power | eXp Realty


Terrific and detailed breakdown of how to make everybody's life easier when dealing with a difficult situation.

Apr 04, 2010 04:05 PM #36
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Charles -- Great consolidation of options.  It also illustrates what a complex process and myriad of options exists.

Apr 04, 2010 04:57 PM #37
Regina P. Brown
MBA Broker Consultants - Carlsbad, CA
M.B.A., Broker, Instructor

Charles, this is a very thorough list.  I have yet to see any short-refi's or any principal write-downs.  Until then short sales and foreclosures will continue to increase!

Apr 04, 2010 04:59 PM #38
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

This is truly wonderful information for anybody in this situation to have.  So many people have no idea what options they really have.

Apr 04, 2010 05:04 PM #39
Joyce Thomas
The Thomas Group Brokered by eXp Realty - San Tan Valley, AZ
Your Home Sold Guaranteed!

Great post Charles with a lot of informative information for homeowners experiencing a financial hardship.  It is unfortunate that so many people are experiencing this throughout the country.  The most recent statistic I read for Arizona was over 50% of homeowners are upside down on their mortgage.  Horrible statistics. 

Apr 05, 2010 01:18 AM #40
Cindy Roeschen
Tricon Homes - Wylie, TX

Very helpful Charles!  Thanks for sharing.

Apr 05, 2010 05:23 AM #41
Billy Studstill
Victory Realty, first time home buyer, foreclosure - Mount Juliet, TN
First Time Home Buyers, Foreclosure, Luxury

This is a great list! Thanks for taking the time to write it down and share it with us!

Apr 05, 2010 06:41 AM #43
Dave Werth

Great job!  im gonna print this off and give it out to a few people that need it! 


Moorhead MN

Apr 05, 2010 07:40 AM #44
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author


Good job and thanks for the education.  Will refer this as necessary. Believe it or not, I am still running into people who do not understand the workings of the words that they hear like loan mod, short sale, foreclosure, credit score and bankruptcy. They are either too scared or not ready to deal with it. Making it available for when people do want it is what your post compliments. Thank you

Apr 05, 2010 07:52 AM #45
Cheryl Ritchie
RE/MAX Leading Edge - Huntingtown, MD
Southern Maryland 301-980-7566

I'm going to reread this! I like how clearly this is explained. Great job!

Apr 05, 2010 07:56 AM #46
Steve, Joel & Steve A. Chain
Chain Real Estate Investments & Mortgage, Steve & Joel Chain - Cottonwood, CA


You've obviously provided a timely post for distressed borrowers. As you've stated there are numerous resources and some FREE!!!Borrowers should SEEK ASSISTANCE.


Apr 05, 2010 08:57 AM #47
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

Saw the post via Jason Sardi.  You did an incredibly good job with it.  Thank you.

Apr 05, 2010 03:25 PM #49
Maureen McCabe
HER Realtors - Columbus, OH
Columbus Ohio Real Estate

Is there a missing comment?  I came back to reread a comment left by another in your industry who disagreed. Gone. Wondering did you delete or did he?  Or maybe I am confusing this post with another. Maybe the comment was on another post written to consumers about their options.

The comment seemed to be tinged with a political flavor....  moralistic?  and the fact that we all seem to be saying "Great post" and he was the lone voice saying "bad blogger" or maybe just "bad blog"  made me want to read that comment again... 

Yes I am prettty sure it was here but is not here anymore.

Apr 06, 2010 12:26 AM #50
Charles Dailey
iLoan - NMLS ID#4474 - Saint Paul, MN

I haven't deleted any comments.  I wish I'd had time to respond to all these comments appropriately.  Thank  you all.

Apr 06, 2010 05:04 AM #51
Gerry Suarez Jr.
Jet Home Loans NMLS 1660135 - Maitland, FL
FL Mortgage Guru

Great job again Charles- there is no way you could have made that much info any more concise.

Regarding the "new" FHA underwater refi it really is just "FHA Secure, part 2". It's the same program Paulson and the Bush administration proffered at the beginning of this mess that flopped and failed miserably (sound familiar?). The current administration is hoping the environment has changed enough for lenders to be more willing to make principle reductions and thereby make this run more successful. I'll give you three guesses where my bets lie, and two don't count...

Gerry Suarez, Jr.

Your FHA Loan Pro!

Apr 06, 2010 12:17 PM #52
Margaret C. Taylor
Century 21 New Millennium MD - Mechanicsville, MD
St Marys/Calvert/Charles MD Real Estate Agent

This goes so far beyond the four 'usual' options.  Even if an underwater owner is not in financial distress, they are definitely in emotional distress after the CMA is shared.  Margaret C.

Apr 17, 2010 03:11 PM #53
Gail Robinson
William Raveis Real Estate - Southport, CT
CRS, GRI, e-PRO Fairfield County, CT

This is excellent!  I'm going to reblog it.  Thank you!

Jun 22, 2010 06:08 AM #54
Robert May
Robert W May - Lethbridge Real Estate - Lethbridge, AB
Real estate consulting

Just reviewing some of the great featured posts of the past today looking for inspiration and ideas for writing some new content for my lethbridge houses for sale blog.  This was a great featured post, although in my market we have not really had to deal with this problem yet.  I hope that we are spared having to, but time will tell.

Jul 23, 2010 06:53 PM #55
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