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Military: What To Do When You’re Upside Down on Your Mortgage

It’s happening almost everywhere you go: People owe more on their homes than the home is worth. According to a recent study by Moodys, some 16 percent of homeowners nationwide are upside-down on their mortgages. The problem is particularly acute in markets like Florida, parts of Arizona, California and Las Vegas, which saw huge price run-ups in the 2000s, followed by a general collapse in home prices – leaving everyone who bought during the bubble high and dry.

This means, of course, that it is very difficult for you to sell the home and move on. To sell the home, you would have to bring a significant out of cash to the table to pay off your own mortgage. 

For military families, this is a problem. Active duty families often have to move every three years. If you’re active, you don’t have the option that people in the civilian world have to simply stay in their homes and ride out the storm.

If you own your home, you’re upside down, and you have a PCS move coming up this year, or if you want to move for any other reason, your options are limited, and none of them are pleasant.

The Nuclear Option

Some people are executing what the lawyer types refer to as “strategic default.” When the situation is hopeless, they move their belongings out, mail their keys to the lender, and walk away. Sometimes there’s no other real choice. But this is the last thing you want to do for a variety of reasons:

  • It’s going to destroy your credit.
  • It’s going to destroy your ability to get another mortgage for years.
  • The resulting blow to your credit could result in the loss of your security clearance. In some fields, this is close to a career-ender.
  • Many employers now check credit reports. When you leave the military, this could hurt you when you look for civilian employment.

Renting and Waiting

You may be able to rent your home out to another family – possibly a military family coming into the area. True, if your mortgage is upside down, chances are you won’t be able to cover your entire costs of ownership, including mortgage payments, interest, PMI (if any), taxes, maintenance and insurance. But if you can get reasonably close, and manage your costs of living, you may benefit when housing prices eventually recover. They likely will, someday – and your mortgage payments are going to be steady (assuming a fixed, rather than adjustable rate), and/or paid off, eventually.

In the long run, a rented and cared for property is a valuable asset – if you can manage the costs of carrying it. Essentially, you will have become a real estate investor. Further, your tax situation eases, because once your home becomes an investment property rather than a personal residence, you can then take deductions for depreciation. This alone can take a big chunk out of your negative cash flow.

(This is a great argument for being conservative in how big of a home you buy. If you are upside down later, your costs of carry on a home you can still rent may be manageable – especially if you have received a promotion or two between the time you bought the house and the time you have to move out.)

Bite the Bullet and Sell

You’ll need to raise the difference between the sale price of the home and the outstanding loan balance from somewhere. And this could hurt. Whatever you pay your old lender is money you won’t have for a down payment for your new home. But if you buy on a VA mortgage, anyway, you may still be ok – you don’t need a down payment to buy a home with a VA loan. Since you owe the money anyway, and you don’t want to deal with a negative cash flow property, this is frequently the easiest and simplest option.

Tip: Don’t tap your 401(k)s, IRAs and TSP accounts to pay off an upside down mortgage. If you’re under age 59½, you’ll have to pay a 10 percent penalty.

Homeowner Assistance Program

Fortunately, the folks who run the Department of Defense aren’t dumb. They’ve also noticed that military families who bought homes were having a problem at PCS time. And so they worked with Congress to establish the Homeowner Assistance Program (HAP), as far back as 1966. The program was expanded in 2009, under the American Reinvestment and Recovery Act, to include those who are moving as a result of an involuntary PCS (under certain circumstances), as a result of a base closure/realignment where the base closure itself was a significant factor in causing home values in the area to decline, widows of deceased service members killed in the line of duty or as a result of deployments after September 11, 2001.

Visit the HAP web site for the full eligibility criteria.

One catch: To qualify, you have to have purchased your home prior to 1 July 2006. And funding for 2012 is dependent on availability.

VA Compromise Sale

Got a VA loan? You might consider a VA compromise sale. The government will consider a settlement offer if their losses on the deal would be less than their costs and losses if they foreclosed outright.

Contact your local Department of Veterans Affairs office for more specific information.

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