You have an investment property, and you can’t afford the mortgage anymore. Or perhaps you’re underwater, which means owing more than the home’s worth. So you need to know how to get out of a mortgage.
There are many ways to escape this challenging financial situation. Mashvisor is here to assist you with information about getting out of your investment property mortgage. Please continue reading to find out more.
Why Get Out Of A Mortgage?
Getting out of your mortgage has these advantages:
- You avoid a difficult financial situation
- You can use Mashvisor’s Property Finder to find another property
- If you got divorced, you can remove your name from the investment property mortgage, if needed
However, defaulting on the mortgage can damage your credit profile. And you may have difficulty getting another mortgage on another investment property. If the property enters foreclosure, it will remain on your credit report for at least seven years.
Sell The Home
The first way to get out of a mortgage is to sell the investment property. Then, you sell the house and use the profits to pay off the mortgage. It may be possible to prepare, list, sell and close the transaction in a few weeks.
The national real estate market is hot as the economy recovers from COVID-19. So, there’s a good shot you can unload your property for more than your mortgage balance. So, if you can do that, you can address the issue directly. But if you bought the property recently, there might not be a lot of equity available.
This means there may not be enough cash left to pay the mortgage off. As a result, you may need to pay the lender the difference.
Choose A Short Sale
When thinking about getting out of a mortgage on investment property, a short sale is a possibility. For example, you may need to do a short sale if you owe more to the mortgage company than the home is worth.
The lender agrees to sell the home for less than the mortgage balance with a short sale. Then the mortgage company accepts the proceeds to pay off most of the loan.
Yet, the lender doesn’t have to agree to a short sale. And they can sue you for the balance. This may cause you a lot of stress and financial heartache. So you should communicate clearly with the lender to see if they will accept a short sale. If they do, get the agreement in writing.
Rent The Home
What if you can’t sell the home for what it’s worth? And the lender won’t accept a short sale? Another option is to rent the house for a higher amount.
Renting a house at a higher amount doesn’t allow you to walk away from your mortgage. But it at least covers the mortgage.
Leasing the home at a higher amount can work in a solid rental market. Rents shot up 16.4% in January 2021 from a year ago. So you may set the rent payment to cover the mortgage and leave some leftover.
Leasing the property at a higher rent offers these benefits when you can’t afford your mortgage:
- Can be done fast without a lengthy sales process
- May not need costly repairs on the home to rent it
- You don’t need lender underwriting
- You still own the home
- Possibly get a rent higher than the mortgage
Rents have been edging higher for years, so you might be able to get a higher rent than you think.
Try Loan Forbearance
Did you lose your job or hours recently? Consider loan forbearance if you think you’ll be back on your feet financially soon.
Many lenders allowed homeowners to pause their mortgage payments for six to 12 months during the pandemic. Forbearance can work if you believe you’ll be able to afford the mortgage again soon.
However, loan forbearance isn’t a loan forgiveness program. You will be required to make up your past payments, but there are several ways to do this.
For example, some lenders will tack your missed payments on the back of the mortgage. If you sell the home, you’ll need to pay back the delinquent payments from the proceeds.
There’s good news, though.
During the COVID economic downturn, many US lenders offered affordable repayment terms. Some options included putting an interest-free loan on the back of the mortgage.
Another way was to lower the interest rate by .5% or even 1%. This option can reduce the monthly payment by hundreds of dollars. That’s right: You might lower your mortgage interest rate without refinancing!
Most lenders do not require homeowners to make a lump sum payment after the forbearance period. This is because most homeowners cannot afford such a large payment at once.
Talk to your lender about your situation to see if loan forbearance will work. This option isn’t how to get out of a home loan exactly. But loan forbearance can help you weather a financial downturn until you get a new job or more income.
Refinance The Mortgage
When you think about getting out of a mortgage, consider refinancing and removing your name from the loan.
This option may work if you get divorced or split from your partner. Perhaps one of you wants to stay in the house while the other leaves. However, the person on the mortgage will need to meet income, debt-to-income, and credit requirements.
A quitclaim deed transfers your portion of homeownership to the other party. But this won’t take your name from the loan. And you are still liable for on-time payments. Remember, removing your name from the loan doesn’t necessarily mean you don’t need to pay the debt.
You should talk to an experienced real estate agent in your city before considering a quitclaim deed.
Another option is to call the lender and simply remove one borrower from the loan. You probably will need to make several phone calls. But the lender should figure out if it’s possible to keep the same loan.
Find Another Investor
If you wonder how to get out of your mortgage legally, there is another technique. Find another real estate investor buying homes in your neighborhood. Many investors hunt for under-market value deals daily.
The investor may buy your home fast so you can get out of your home loan.
Selling to an investor may not be the most profitable way to get rid of the mortgage. They’ll offer a discounted price but you won’t need to pay closing costs. This method can help you get rid of unaffordable mortgage payments fast.
Some underwater homeowners sell their homes to a home buying company. These companies specialize in acquiring properties for less than they’re worth. There are many legitimate companies in this specialty but do your research.
Sometimes, ‘we buy houses cash’ companies take advantage of desperate homeowners. Some firms may make promises they can’t keep. Or they’ll tell you things you want to hear.
Before selling your home to a company, consider these points:
- Do they have proof of funds to show they have the cash to buy the home at the offered price?
- Are they well rated by the Better Business Bureau? If there’s no information on the company online, that’s a red flag.
- Do they have customer testimonials on their website?
- Do they have a bricks-and-mortar office and staff to assist you with the selling process?
- Do you talk to the same sales professional during every phone call or meeting?
Go Into Foreclosure
A voluntary foreclosure means talking to the lender and giving the property back. A foreclosure will damage your credit. But at least you can avoid making mortgage payments.
If you don’t make payments without calling the lender, they may start an involuntary foreclosure. First, the mortgage lender will use the state’s legal system to return the home. Then, they will resell it to another buyer.
The homeowner may stay in the home during the foreclosure process. But you’ll need to leave and find another place to live. The mortgage company also will probably try to collect the debt. Finally, you may need to declare bankruptcy.
Do A Deed In Lieu Of Foreclosure
This is a legal and binding agreement that gives ownership of your home to the mortgage lender. In exchange, you’re released from paying the mortgage. The bank will sell the home to get most of their money back.
If you’re about to enter foreclosure, many lenders are receptive to this arrangement. They save considerable time and expense by avoiding foreclosure.
The homeowner may not need to give the lender the difference between what’s owed and the sales price. But some states require you to pay taxes on the forgiven sum. Check with your CPA for information; that way, you don’t end up with a huge tax bill next April!
Walk Away From The Home
The last option when considering how to get out of a mortgage is walking away. Real estate professionals refer to this as a ‘strategic default.’
During the 2008 mortgage meltdown, millions of homeowners and investors couldn’t afford their payments. And they couldn’t sell the home for what they owed. Nor could they rent it to cover the mortgage. So they walked away from their homes.
Homeowners who consider this option should talk to their lender. They may offer a short sale or loan modification when they learn you want to walk away.
Lenders usually don’t want to foreclose. They’ll try to work with you. You may even stay in the house by modifying the mortgage or payment terms.
Also, remember that walking away from the home loan will still leave you in debt. And the mortgage company can sue you for the outstanding balance when the home is sold.
It’s best to be honest with the lender. You may find a way to get out of the mortgage with minimal financial and legal penalties.
Next Steps If You Can’t Afford Your Mortgage
So we’ve detailed nine options about how to get out of a mortgage on an investment property. Which should you choose? How do you get started? Don’t worry: Many homeowners have been in your shoes. You have options.
According to Consumerfinance.gov, your first step is to call your mortgage servicer. Then, locate their phone number online or check your mortgage statement.
When you call the mortgage company, be ready to cover these topics:
- Why you cannot make your monthly mortgage payment
- Whether the financial problem is permanent or temporary. If it’s permanent, you may need to sell your home and move into something less expensive
- Information about your monthly income, debts, expenses, and savings
Provide the lender as much documented information you can about your financial situation. This will speed up the process. Most investors feel relieved once they’ve laid out a financial plan with their lender.
Keep in mind that most mortgage companies don’t want homeowners or investors to go into foreclosure. Foreclosing and reselling a home is an expensive, time-consuming process. If possible, it’s usually better for both parties to keep the house in your name.
This is why most lenders have many programs to help people avoid foreclosure. The mortgage service will review your case to determine the best options. Then, they may ask you to submit a mortgage assistance application. After review, they’ll tell you what they can offer to help.
Need to cancel a mortgage application before closing? Call your lender and explain the situation immediately.
The methods listed here are the most popular options for getting out of a mortgage. Seeing how to get out of your mortgage on an investment property can help relieve stress and give you a path forward.
But remember to review the options with your lender and agent as soon as possible. That way, you know the best choices when you can’t afford your mortgage.
You can rely on Mashvisor’s extensive real estate agent database to find a qualified real estate professional to help with your mortgage situation. And when you’re ready, Mashvisor can help you find your next investment property.