What if I owe more than my home is worth?
Have you heard the terms “under water” or “upside down” regarding homeowners and their mortgages? These terms refer to homeowners who owe more than their house is worth. Unfortunately, this situation is all too common in today’s troubled economy. If you find yourself “under water”, you may yet be able to turn your situation around. Please give these options a try before walking away from your home. Avoid foreclosure. It is the absolute worst choice to make.
–Banks are becoming more willing to do loan workouts, also called loan modification or loan reworks, with homeowners who are behind on their payments. Even if your house has already gone into foreclosure, you might still be able to work things out with your lender. It may take some negotiation, but the bank appreciates honest people who are sincerely trying. Below are the different options for reworking your loan:
1. Loan Reduction. To get the ball rolling, call your lender and ask for the loss mitigation department. If you can show proof that homes like yours in your area have recently sold for less than what you owe on your home, the lender may agree to lower the loan amount of your mortgage. Lowering the loan amount will, in turn, lower the monthly payments.
NOTE: No matter which of these options you are working on, DO NOT stop communicating with your lender. This leaves the lender to conclude that you have given up on trying to save your home, and makes them more likely to move forward with foreclosure proceedings. As a matter of fact, cutting off communication with your lender will ensure foreclosure.
2. Extension. This is a loan modification (also handled by your lender’s loss mitigation department) that extends the life of your loan. The interest rate does not change, but your payments are spread out over a longer period of time. This change will reduce your payments. True, you will be paying more interest, but your credit and your home will be saved.
3. Interest Rate Reduction. This option is especially favorable if you have an adjustable rate mortgage that has risen so high that your payment is no longer affordable. On the whole, banks do not want to foreclose. It is costly for them, time consuming, and they always lose money on the deal. Lowering the interest rate is a better option for the bank.
If you are behind on your payments, but are expecting a lump sum of money (yearly bonus, insurance payout, or tax refund) that will catch you up, your lender may be willing to grant a forbearance. This means that the lender agrees to temporarily suspend your payments. You agree to bring the payments up to date by a specified future date and resume monthly payments at that time. Resuming the payments on your loan is called a reinstatement.
If you know your lapse in payments is temporary, but you are not expecting a lump some, your lender may agree to allow you to continue making monthly payments with extra added on. The extra amount will be applied to your overdue balance.
Rent/Lease Your Home
If you know your inability to pay is not temporary and you will not be able to catch up on your payments, you may be able to rent out your home. There is a flood of people, most of whom have lost their homes to foreclosure, who are now looking for a home to rent. The ideal situation is to rent your home for an amount that will cover your monthly payment. The house should at least rent for somewhere close to the payment. If you have to make up $100 or so a month, it will probably be worth it. You can find a cheap place to rent for awhile. It may be a step down for you and your family, but these are hard times, and it won’t be a forever thing. Once housing sales recover, you can sell the house then, and maybe even make a little money in the process.
If you’ve suffered financial devastation, i.e. lost your job or have had a medical crisis, you may know that you will not be able to pay for your home at all. In these situations, a short sale may be the best way to avoid foreclosure. In a short sale, the house is offered for sale at a price that is less than you owe. Sometimes the bank will accept the reduced amount as payment in full. Other times, the bank will require you to pay some, or all, of the difference. A friend of my husband’s, Mike G., sold his house via short sale. He made payment arrangements with the bank to make up the shortage. He joked that he will be paying the bank $100 a month for the rest of his life. Essentially, Mike decided his good credit is worth $100 a month to him.
If you have a reasonable interest rate and loan amount, you may be able to sell your home to someone that can assume your loan. Loan assumption is essentially someone agreeing to take up your payments. When the assumption is complete, you no longer own the home and are no longer responsible for the mortgage—saving yourself from foreclosure. However, if you have a high interest rate or are upside-down on your mortgage, it will be impossible to find someone willing to take it over. Work very closely with your lender during loan assumption. Many homeowners have been scammed into thinking their loans are being assumed, but gave up their homes only to find that they were still on the hook for the payments.
Deed in-lieu-of mortgage
A deed in-lieu-of mortgage is only one step above foreclosure as far as how it affects your credit. It is a desperate measure. This is essentially a process in which you voluntarily surrender the home to the lender. In foreclosure, the bank initiates a legal process of eviction, forcing you to vacate and surrender the property. If you do it voluntarily, the bank is saved the expense of suing and evicting you. Having the deed-in-lieu-of mortgage on your credit is less damaging than having a foreclosure.
A foreclosure on your record essentially says that you have breeched a legal contract on the most important financial obligation of your life. It further indicates that you breeched the contract in a manner that forced the lender to resort to suing you. In short, it appears that you are not an honest person. That is why you must avoid foreclosure at all costs.
It will follow you for years, maybe for the rest of your life. Once you lose your home in the foreclosure process, you will need to live somewhere, right? Well, landlords and leasing agencies routinely check your credit when you apply for a rental. Employers often will check credit before hiring or promoting. Now that you know what a foreclosure says to those who check your credit, do you really want that on your record?
Most Important To Remember
Keep open communication with your lender to let them know that you are genuinely trying to work things out.
Ask to speak with the loss mitigation department about reworking your loan.
Make suggestions about possible solutions: loan modification, forbearance, repayment, short sale.
Don’t make up sob stories—honesty is always the best policy.