The housing crisis has caused a great deal of stress to homeowners needing mortgage help, and has pushed more than one out of every seven of them into the path of foreclosure. Help available to homeowners trying to avoid foreclosure include options like; repayment and forbearance, mortgage modification, deed in lieu of foreclosure, bankruptcy, investor purchase and short sale. In this article we will take a look at these different options available to homeowners who are in financial hardship.
Foreclosure While foreclosure should not be an option for most borrowers in hardship, it is the inevitable outcome if action is not taken. A foreclosure simply destroys a homeowners credit and will make it impossible for a borrower to qualify for most loans for at least five years or more. In addition and perhaps most importantly, after a foreclosure, a borrower is still liable for the original amount they owe their lender in many cases. This means that in most states, lenders can come after defaulted borrowers vehicles and other assets years after a foreclosure is completed. While foreclosure can seem like the easy and simple mortgage help solution, it can also be the most costly to all parties.
Repayment Plan / Forbearance An option like a repayment plan, also called a forbearance, is designed to allow the homeowner to pay back delinquent mortgage payments over a certain amount of time. Forbearance is best successful in a situation when a borrowers hardship was only temporary, and they are already on the road to complete financial recovery. If the hardship is still not completely resolved at the time the borrower enters into the forbearance, it is typically only a temporary fix to a financial problem and will eventually require other mortgage help options.
Loan Modifications Another mortgage help option for the homeowner who wants to avoid a foreclosure might be a loan modification. A loan modification can do one of the following; change the principal balance of the loan, the length of the loan, or the interest rate. When opting to try a mortgage modification, it is good to know that the homeowner can be in default, in foreclosure, in bankruptcy, late, or current at the time the application for a mortgage modification is made.
Actual principle reductions in the mortgage balance are extremely rare and occur in less than 1% all loan modifications, with the vast majority of loan modifications leaving borrowers still in a negative equity position.
Most successful loan modifications will usually bring the homeowners mortgage payments down but prolonging the loan term. Historically, loan modifications are offered as a temporary solution to borrowers, similar to putting a band-aide on a hemorrhage. In most cases they only prolong the inevitable downward path that financial hardship brings.
In recent years, some loan modifications have become good permanent solutions to borrowers whose hardship is temporary, and who can easily afford a slightly lower payment. However, banks can be very hard to deal with and have too often been found guilty of turning down loan modifications some times a year or more after the temporary one was approved. There is no clear answer or excuse as to why they do this.
However, if it is your desire to stay in your property, you will be well advised to get a professional, fee based company to manage it for you, for the same reason you are generally well advised to have a lawyer to represent you in court, rather than do it yourself.
Deed In Lieu of Foreclosure A deed-in-lieu of foreclosure is a mortgage help option that can be available to a homeowner in default that is already in foreclosure proceedings. This option can allow the homeowner to deed back the home title to their lender prior, rather than continue with the foreclosure process.
Lenders will benefit from a deed-in-lieu because they will not have to invest more time and capital resources in the foreclosure process and dealing with potentially vandalized property, should the home sit for a long time after the foreclosure process.
While this may seem like a good option to many homeowners in hardship, in order to “wash their hands” of the situation, there can still be severe penalties. In some cases, the borrower is still completely liable for the deficiency (loan balance less proceeds from final property sale), and their lender can and will pursue collections years up the road. If you go this way, be sure you get a letter called, a “waiver of deficiency” prior to signing final papers. The impact to a borrowers credit and ability to purchase a property again in the future is nearly identical to a short sale.
Bankruptcy The bankruptcy option is for homeowners who want to stop foreclosure, however; not all states allow it for a full foreclosure solution. Bankruptcy will not stop the foreclosure process but simply delay it if a homeowner cannot afford to continue with their mortgage payments. Filing for bankruptcy during a foreclosure can result in a damaged credit score, can be expensive and can only be filed once every seven years. A bankruptcy can not only affect a borrowers current and future employment in many fields, but will also scar a borrowers credit for many years to come. While a bankruptcy may seem like an easy way out, it should only be used as a last resort.
Investor Purchase This is a mortgage help option for homeowners who want to not only stop foreclosure, but quickly repair credit ratings and repurchase another property without waiting several years for their credit to correct itself. The investor buys the house subject to the current homeowners loan, brings it current and continues payments until the house resells with the investors profit. This totally recovers the homeowners credit right away.
Short Sale A more common method to avoid foreclosure has been to do a short sale. A short sale is for the homeowner who has encountered a financial hardship that has caused them to be late on mortgage payments or for the homeowner who foresees their hardship taking a toll on their ability to pay their mortgage in the future.
In a short sale the lender will take a lesser pay off than what they are owed once the home is sold. This is not done as a favor to the borrower, but only for the lender to also avoid expensive foreclosure expenses and minimize future loss. This mortgage help option will allow the homeowner to stop foreclosure and save the huge impact a foreclosure would have on their credit. A short sale will typically recover a homeowner’s credit in a short period of time and leave them eligible to purchase a home again in only two years.
In addition, in most cases the lenders will completely forgive the borrower of any deficiency or shortfall in the money that they were originally owed. (Be sure you have that “waiver of deficiency" letter before you sign final closing) Lenders are motivated to cut their losses with a short sale, so there are also many cash back incentives offered to borrowers to complete a short sale. These are much more labor intensive for your listing Realtor so you must choose a Realtor who is familiar with the details of initiating a short sale and following it through to completion. See the testimonial in "Bank Wars" for the story of a rather difficult short sale. Most, thank God, are not quite that contentious.
Conclusion It is important for homeowners to understand that they do have mortgage help options available to avoid foreclosure and should immediately seek the guidance of a local distressed property specialist or housing counselor as soon as they start to realize their financial situation could take a toll on their place of living. Contact us for no cost assistance and guidance during your time of greatest need.
Legal representation or advice is recommended in all legal matters. This site and brokerage represented is not affiliated with the government. If you use our services, your lender may not agree to accept a short sale or change the terms of your loan. We do not advise you stop paying your mortgage.
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? Whats with the doggie? Well, Miss Piggy is a rescue dog taken away from an abusive home by a veterinarian after he treated her for wounds in which she lost an eye. She is now a very happy doggie and I thought, a much prettier face than mine. She escaped her bad home… as will you, escape mortgage, stop foreclosure and smile:)