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Posted April 27th, 2012 under Underwater Mortgage

Get Your Financial House in Order Before You Make a Decision About Your Underwater Mortgage

Tags: underwater mortgage, avoid foreclosure, homeowner counseling services

Get Your Financial House in Order Before You Make a Decision About Your Underwater Mortgage

If you're underwater on your mortgage, you may feel overwhelmed. Should you try to get a loan modification? Attempt to avoid foreclosure by selling your home in a short sale? Or just go ahead and let the bank foreclose? The right answer for you depends on your specific circumstances. But no matter which route you decide to take, it helps to understand your total financial situation before you make a decision, so that you can choose the path forward that's right for you. Below is a list of some of the financial issues you need to consider as you evaluate your underwater mortgage options.

1. Consider self-employment income. Self-employed homeowners who are considering a loan modification or short sale need to make sure to list their self-employment income correctly on any income and expense statements they make to the bank. Most important is remembering to include any self-employment taxes you pay in your list of expenses. Failing to account for the taxes you pay could make it look like you have a higher income than you really do, which could mean that the bank won't approve your request for a short sale or loan modification.

2. Take stock of all your expenses. When putting together a list of your expenses, it's easy to overlook certain costs, or underestimate them. Remember list all of your expenses when applying for a short sale or loan modification (including clothing, healthcare expenses, commuting costs, food and educational expenses) It's critical to correctly document your expenses, because you want to show your lender that your expenses exceed your current income.

3. If appropriate, look for ways to "increase" your expenses. Perhaps you've made a list of everything you spend money on, and your income still doesn't fall short of your expenses. If that happens to you, there are steps you can take to increase your expenses and lower your income, including making larger contributions to your employer-sponsored retirement accounts, such as a 401(k), or increasing your tax withholdings. Taking these steps will make it look like you have a lower income and improve the chances that your lender will approve your loan modification or short sale request, thus helping you avoid foreclosure.

4. Review your insurance coverage. Everyone should regularly review their insurance policies (including homeowners insurance and car insurance) to make sure they have the right coverage and are getting the best possible rate. For underwater homeowners considering a short sale or foreclosure, you'll want to conduct that review before you stop making mortgage payments. That's because your credit score, which will fall after you stop paying your mortgage, affects your insurance rates. Review your coverage and get new rate quotes now, before you go through foreclosure or a short sale, and you'll likely save yourself some cash.

5. Open new bank accounts. Many homeowners have checking and savings accounts with the same bank that services their mortgage. If that's your situation, you'll probably want to shift your checking and saving to a new bank before you stop making mortgage payments. Why is this such an important step? Because, once you stop paying your mortgage, your lender is entitled to "sweep" any other accounts you have with them in order to get your mortgage payments. By moving your accounts to another bank, your lender won't be able to do that.

These aren't the only issues you need to think about if you're underwater on your mortgage. Creating a plan to deal with an underwater mortgage is a complicated process with many moving parts. That's why homeowner counseling services like Homeowner 101 exist. We created the Underwater Homeowners Assessment and Action Plan to help you understand your different options and the affect they could have on your larger financial situation. Once you've received your own Assessment and Action Plan, you'll have a better idea of what decision is best for you.