First and foremost its vital that you communicate regularly with your lender and understand all of your options. Whether you're about to have your house sold at auction, foreclosure is in sight, or you've missed your first payment or possibly second payment, you may still have a good chance of saving your home and avoid the foreclosure nightmare. Also, if you are current and in good standing today with your monthly payments but recognize the coming months may get financially too tight, then be prepared and act now! Let's review a handful of options, highlighting the positives and possible negatives of each process. Which avenue is best for you during your hardship?
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- Loan Modification: This method of getting back on track with your home loan is most often the best route when the hardship you're facing is temporary. There should be no damage to your credit history and you can stay in your home happily. Some solutions include; minor adjustments by deferring your past due amount to the end of the loan or reducing the payment for the next few months/lowering your interest rate. A loan modification occurs where all parties involved with a problem loan mutually agree to create a new and better loan. The loan modification should concur previous financial issues, ensuring new obligations are met seamlessly. However, modifying your home loan is not as easy as it sounds, especially attempting to mange it on your own. Contacting, communicating and working with the proper individuals with in your Lender's organization can be frustrating and simply inefficient. I suggest working with a seasoned professional to help expedite the process. Your best bet is to retain a professional, experienced mortgage attorney and/or legitimate, credible law firm experienced with a history of loan modification successes. Banks do not want to foreclose on your property. They would rather continue collecting your money than take over your property, especially with the current high volume of foreclosures nationwide.
However, if your credit is severely damaged your lender may not approve the modification in fear that the new proposed terms will not be met successfully. Monthly payments may still be a bit high as you are keeping your entire mortgage balance plus the total default amount.
- Refinance: If your hardship is due to your current tight financial situation amplified by your adjustable rate mortgage that's inflating your monthly payments, you may still be able to refinance into a fixed-rate loan. However, if you are already late on payments and your credit history has gone down hill, this option may be unavailable. Work with a trusted source or loss mitigation specialist to review and dictate your possibilities. They should be able to give you a clear answer as to whether this is possible without charging you any fees. There are of course normal charges and fees if you pursue and successfully refinance and your credit will stay in tact.
Keep in mind, refinancing is most likely not available if your credit is already severely damaged. There must be a certain percentage of equity (the amount you owe on the loan is less than what the property is worth and the positive difference is your equity) and the monthly payments may still be somewhat high.
- Home Sale: If the amount you owe on your property is less than or equal to the current market value of the property, selling your home may be a good option because you will be able to pay off the mortgage in one lump sum. But in today's real estate market this option is rarely the case. As you probably know, home prices have decreased nationwide, the job market has pinched people out of work and new prosperous jobs are tough to come by. Most people in mortgage trouble today are faced with the problem of owing more on their property than it's worth. If you are in a position to sell your home and pay off the mortgage in full, then you do not need a loss mitigator and should contact your local, trusted Realtor.
- Short Refinance: A Short Refinance, also known as a short payoff, is a transaction where the lender agrees to accept less than the full amount owed on the entire mortgage. Instead of the property being sold, it is refinanced with a new bank or lender. The short refinance allows the homeowner to retain ownership of the property, while at the same time avoiding a foreclosure or possible bankruptcy. If you want to keep your home, but don't have enough equity to get into a foreclosure bailout loan, a short refinance is your answer. By negotiating a short refinance with your current lender, you can obtain a payoff of less than the full amount owed, and refinance your home with a new lender. At this lower payoff amount, you are then able to have a mortgage you can afford. This option may not be available to you if you are severely past due on your mortgage or have severely damaged credit.
Again, with a successful short refinance the entire debt is wiped away and the backs will not and can not go after you for the difference. I suggest working with a loss mitigation company who will manage and negotiate on your behalf. You should have no out-of-pocket expense because they will work all fees into your new loan. There should be minimal damage to your credit.
- Short Sale: Are you behind on your mortgage, or unable to work with and negotiate new terms with your current lender, or concerned about your home foreclosing and therefore damaging your credit? If you fall into any of the above categories then the short sale option may be the best avenue for you. In such an event the lender agrees to forgive the financial portion of the mortgage payoff that is not covered by the sale price. In return, the borrower does all the legwork associated with the listing and selling of the real estate. Here is an example of the short sale process:
- You owe $350,000 on your home and are unable to make your minimum monthly payment, and your financial situation in the coming months doesn't look to get any better.
- You've fallen behind on your monthly mortgage payment and are entering into the pre-foreclosure period.
- At this point FIND AN EXPERIENCED REAL ESTATE AGENT WHO HAS DONE A SHORT SALE BEFORE and has a successful track record. Your real estate agent will be able to deal and negotiate with the mortgage company on your behalf. An experienced short sale agent will give you a much better chance of successfully short selling your home.
- The property can then be listed with stipulation that the sale is pending third party approval.
- Interested buyers make offers that are submitted to you and your agent. If agreeable, offers are sent to the bank for approval. In this scenario, an offer may come in at $300,000. You submit this offer to your lender, requesting forgiveness of the outstanding $50,000.
If successful, the banks will report this on your credit history as 'Settled For Less Than Owed.' This is a negative mark on your credit score but is nothing close to a bankruptcy or foreclosure.
- Deed in Lieu of Foreclosure: This is the last resort when faced with a possible foreclosure. It means simply giving away the deed to the bank in exchange for them not pursuing a foreclosure action against you. This does significant damage to your credit score, but is still better than a full foreclosure. You will avoid "foreclosure" on your credit and the bank will not pursue you for the outstanding balance on the loan. This option is only available if the house has been on the market for 6 months with no buyer and if the foreclosure sale date hasn't been set yet.
- Bankruptcy: This is the final alternative to foreclosure. This can be a costly process and tough to successfully accomplish since your hardship already has you in a financial bind. There are two basic options available to consumers under the bankruptcy laws: chapter 7 and chapter 13.
The major benefit of a chapter 7 is to get rid of unsecured debt such as credit cards and medical bills. You will be allowed to keep certain kinds of property under the exemptions allowed by federal and/or state laws. The definition of "exempt property" differs in each state and usually includes your home, car, clothing, furniture, household appliances, and tools of your trade -- each to a certain dollar amount.
While a chapter 7 bankruptcy is appropriate under the right circumstances, its use is limited in comparison to a chapter 13. A chapter 13 can be used to protect "unexempt property." In a chapter 13, you pay a portion of your monthly income to a trustee for distribution to your creditors. A repayment plan is useful when you are behind on your home mortgage payments, taxes, or a car loan. A chapter 13 may be in effect from three to five years. It normally allows you to pay less than you owe. The extended payment period allows you to make smaller payments. You will be allowed to keep part of your monthly income to pay for living expenses like food, clothing, rent/mortgage, and medicine.
To qualify for a chapter 13 repayment plan, you must have regular income, and your unsecured debts must not exceed $250,000. If your unsecured debts exceed $250,000, you may be able to qualify for a repayment plan under chapter 11. Proceedings under chapter 11 are much more complicated and expensive (but not more powerful) than those available under chapter 13.
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