I would like to preface this by saying that I am a real esate agent and not a tax professional or attorney. Before deciding which of these option is best, one should consult with a CPA and or real estate attorney.

In the State of California, approximately one third of all mortgage holders is “underwater” meaning they owe more on the mortgage than the real estate is worth. For anyone in this situation, there are basically 7 options, and they are as follows.

Option 1 Pay down the balance or Sell: This is an option if you have money to spare. We can sell your home and you pay the difference between what your house sells for and what you owe your lender. The positive to this is you can keep your credit intact. The negative is that you need disposable dollars to do this.

Option 2 Short Sale: A short sale is where we will sell your home for less than what you owe on your mortgage. We need to negotiate with your lender(s) to accept less than what you owe. It will make a difference if your loan is a purchase money (non-recourse) or non-purchase money (recourse). Note: There can be tax ramifications depending on if you have a recourse or non-recourse loan. We can explain the difference if you give us a call. The positive is that you can pay off your loan(s) without any money out of your pocket. The negative depends on how many payments you missed. It can reduce your credit score 50-150 points (estimate).

Option 3 Walk away or Foreclosure: This is a situation where you just walk away from your house. You can still have negative tax consequences and it can affect your credit by approximately 250 points. In most cases, a short sale is a better option.

Option 4 Bankruptcy: Sometimes you will be advised to file bankruptcy. In a lot of cases, people will suggest this because they do not know about other options as mentioned above. This should be a last resort. It can affect your credit by approximately 400 points and your credit for the long-term.

Option 5 Deed in Lieu of: This is a situation where you basically hand the keys over to your lender. In most cases, the last thing your lender wants is the property back, and if they do, it is normally prior to foreclosure. At this point, your credit is probably already negatively affected. If you were current with your payments, why would your lender take the property back?

Option 6 Loan Modification with Your Lender: This is a situation where you want to stay in your property, but can’t afford your current payment(s). The lender might renegotiate interest rates or reduce your payment and add it on to the backend of your loan.

Option 7 Rent it out: You can rent your property out until the market turns upwards. In most cases, there will be a negative between the rent and your loan payment(s). Most of the experts feel this market will take 2-4 years to turn-around. You should be prepared to rent out your property a couple of years.
Once again-before deciding which of these options is best, a CPA and or real estate attorney should be consulted.