Q: As a single woman a couple of years ago, I bought a loft with a 5/1 adjustable-rate mortgage (ARM) and no money down. My mortgage will start adjusting in about two years, and I am now about $50,000 upside down. In the meantime, though, I’ve gotten married (my husband is not on the loan) and we’d like to have a child soon, which won’t work in the loft.

We are thinking of walking away from the loft and getting some closure on it, so we can move into a home that makes sense for our family. We’re also thinking about trying to get a loan modification, although I’d really rather not hold on to the loft. And some people we know have recommended a short sale. I feel like my past decision to buy the loft with that ARM trapped us in this situation. But I also want to know what to do now so we don’t get trapped again.

A: Between putting no money down and the depreciation in value, you now find yourself, like almost 30 percent of your fellow Americans who own homes, owing more than your home is worth. Somewhat more rare about your situation, though, is the fact that you also are having a major change in lifestyle situation that renders your home less feasible to hold onto, even if you were willing to do so to wait for the value to rebound.

You might have found out that it’s very tough now — and impossible, for many — to qualify for an additional mortgage for a more suitable home, unless you have income (rental and otherwise) to more than offset the expenses of owning both homes. Hence, you feel trapped: You need to move on, but can’t sell the home for what you owe on it.

Whether walking away is the right decision for you is not something I can tell you — it depends on your personal situation, including what state your home is in and the resulting ramifications of foreclosure, which do vary by state.

Foreclosure is a traumatic experience, emotionally and otherwise, and walking away implicates the ethics of going back on your word to the bank. However, there is a countervailing point of view to the effect that, in the words of a colleague of mine, your highest ethical obligation is to your family, not the bank.

In my latest, free white paper, "REThinking the Walk Away," I deeply explore the issues you should consider before deciding to walk away.

Here’s my advice. Reflect on how you got trapped in the first place, and how there were some things in your control (your downpayment, loan choice, etc.) and other contributing factors (like the market’s dramatic decline) that were not. The point of this analysis should be to scrape every single lesson out of your experience.

The point is not to create a guilt complex, chastise yourself or fixate mentally on what you would have done differently. In fact, many homeowners I know have conducted this analysis and concluded that, if they could do things over again, they would probably not do a whole lot differently, but in the future they might operate more conservatively with their real estate and mortgage decisions (or not!). …CONTINUED

So, get the lessons out of this thing, and then keep it moving.

The primary thing I want you to take into your current decision process is that the various options you’ve been considering are not mutually exclusive. In fact, many real estate professionals counsel homeowners that the first step to all three of your options (i.e., short sale, loan modification and walking away/foreclosure) is the same thing: ceasing your mortgage payments.

If you decide to go that route, before you stop making your mortgage payments be very clear ahead of time that your intention is to dispose of the property, in one way or another.

Also, make sure you fully understand and are truly comfortable with the implications of walking away or losing the loft to foreclosure before you miss a single payment. I’ve seen too many people stop making their mortgage payments, hoping it will nudge the mortgage company into offering them a loan modification so they can keep their home, and end up losing the home when their arrearages spiral out of control.

And the reverse is true: Around 26 percent of homeowners who apply for and receive a loan modification end up redefaulting on their mortgages, most winding up in foreclosure. Before you apply for a loan modification, which is not a simple, fun process, be aware that the chances you’ll receive principal reduction are very low (around 1-2 percent).

If you’re disinclined to hold onto the home anyway, you might be better off to simply sell the place on a short sale (assuming your lender will allow it) and get closure, rather than missing some payments to get a loan modification, (predictably) outgrowing the loft and then circling back around for some more late payments and credit damage in six months or a year when you decide to do a short sale or walk away.

Developing certainty and clarity about your vision and dreams for your family for the next few years, and using that to drive your decisions, will keep you from setting yourself up for failure this time around.

If you do decide to stop making your mortgage payment, there’s no reason you can’t submit applications to your bank’s loss mitigation department for both a loan modification and a short sale. (If you do this, please be honest with your broker/agent about it, so they are aware and can make prospective buyers aware that a loan modification is a possibility, in which case the house will not be sold.)

Walking away and foreclosure should be your very last resort, not your first one. Whatever decision you make should be with full information about the financial, credit and tax consequences you face. Please consult a local real estate broker or agent, a mortgage pro you trust (who can advise you about the impacts of your next move on your ability to buy again in the future) and a tax adviser.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.


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