If you are having difficulty making the payments on your mortgage or your property is upside down (if the current loan amount exceeds the current value of the property) keep in mind that you are not alone. It is estimated that approximately 25% of all homes across the country are upside down. When you add the fact that there will be $2.5 trillion dollars of mortgages including Interest Only Loans and Option ARM Loans that will reset over the next 36 months, the problems are just beginning.
Due to the economic climate and declining property values (which are estimate to decrease in additional 20% in some parts of the country), it will be very difficult for homeowners to refinance these mortgages into long term fixed rate loans. As you can see these are not normal times and the options for homeowners have become more complex. Listed are some of the options as a homeowner in this tough real estate market:
1) Call Your Bank
If you are getting behind on payments, contact your lender first. While this may seem like the last person you want to talk to, lenders are often willing to work with you on late payments and financial difficulties.
Pros: Bank or Mortgage Company could provide you with immediate relief.
Cons: The banks will try to help although they will obviously watch out for their own bottom line. Most banks are grossly understaffed and the process can be extremely frustrating and overwhelming for most consumers due to long wait times on the phone and repeated requests for the same documentation from the lenders.
2) Loan Modification
A loan modification is a process whereby any aspects of the original loan terms and/or amount have been changed to benefit the borrower in hopes of avoiding foreclosure or improve your ability to make the payments of the mortgage. Under the government program known as HAMP - Home Affordable Modification Program, most struggling homeowners should benefit and get some relief from a reduction in monthly payment, but not everyone is qualified. A loan modification can help you with the following:
* lower your interest
* extend the payment terms up to 40 years
* deferral of current principal owed
* lower your payment and help you stay in your home
HAMP was developed to help 4.5 million home owners with loan modification but unfortunetely it has only helped 300 thousand homeowners so far.
You can either go directly to a private company or go to a government HUD advisor who will walk you through the paperwork for submitting a loan modification.
Private Company Option
Pros: A good loan modification company will Not charge you any upfront fees, let you know upfront if you qualify, reduce the time for a response. Seek a reputable company offering you a 100% money back guarantee if they are not successful Also, a good company will not waste your time by letting you know if you qualify quickly based on your income and expenses and also give you viable options if you do not qualify for a modification. Furthermore, a good company will fight to get you the best deal.
Cons: It will take you 4-6 months to recoop your investment for fees paid based on the savings realized from your newly modified payment
HUD Counselor Option
Pros: Free of charge
Cons: Not many modifications have been accepted (only 300,000 homeowners have been helped, longer wait times up to 4 months.
3) Refinance Options
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. The borrower would refinance to a low rate FHA loan. A Short Refinance is similar to a Short Sale, but rather than selling your home, you are able to remain in your home by refinancing into a new loan with a lower principle balance and a new fixed rate that is affordable.
Pros: Lower rate, reduces principle balance of mortgage and lowers payments
Cons: Could affect your credit, could have tax consequences due to mortgage principle reduction (cancellation of debt).
Fannie Mae and Freddie Mac Refinance Options
If your loan owned by Fannie Mae or Freddie Mac you can refinance up to 125% of the market value of your property. This is especially helpful to homeowners who have a high interest rate and could not refinance due to the decline of their property. Since rates are still significantly down you can still refinance a little above market rate. To see if your property is a Fannie Mae loan go to http://loanlookup.fanniemae.com/loanlookup/ and enter your address. For Freddie Mac go to https//ww3.freddimac.com/corporate/ and enter your address.
Pros: Gives homeowners refinance options for people who are upside down or could not refinance in the past.
Cons: Property is still upside down
FHA Refinances for Underwater Homeowners
Underwater loans are refinanced to a FHA loan in which total debt must be 115% of total market value. The lender writes off a minimum of 10% of the unpaid balance of the original loan but the expectation is the lender will write off more. The government provides financial incentives for the original lender to write off the 1st and 2nd mortgage principal.
Pros: Lower payment and reduces principle mortgage balance
Cons: Reduction of principle balance will be a negative on credit and potential tax consequences (cancellation of debt)
Reverse Mortgage
If you're facing foreclosure, and you are over the age 62 The solution may be right in your own home, through the careful use of a reverse mortgage.
To be eligible for a reverse mortgage, HUD's Federal Housing Administration (FHA) www.fha.gov requires that the borrower is a homeowner, 62 years of age or older; own your home, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan; and must live in the home. You are further required to receive consumer information from HUD-approved counseling sources prior to obtaining the loan
Unlike a regular mortgage, which requires that you repay a lender for a loan to buy a house, with a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank. The loan is normally repaid, with interest, from the proceeds when you or your heirs sell the house when the homeowner is deceased or moves and sells the property.
Pros: No payments through out the life of the loan, Get you out of delinquent loan so you can stay in your home, credit scores and income not as an important
Cons: High closing cost
4) Short Sale
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. A short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than would result from foreclosure or continued non-payment. Borrowers are able to reduce the damage to their credit history. A short sale is typically faster and less expensive than a foreclosure.
Pros: Get you out of the house lessor hit on credit than foreclosure.
Cons: Hurts credit; reduces property values in the whole neighborhood
5) Deed in Lieu of Foreclosure
A Deed in Lieu of Foreclosure is an alternative to Foreclosure in which you voluntarily work with the bank to give them the title without the bank going through foreclosure proceedings. If you consider this option it is a very good idea to consultant an attorney since the bank could go after you if there is a deficiency of what you owe vs. the amount they receive once the bank sells your property.
Pros: Lesser hit to your credit vs. foreclosure
Cons: Hurts credit; reduces the property values in the whole neighborhood
6) Foreclosure
Foreclosure is an option, but it will have a negative affect on your credit and will stop you from buying a home up to 10 years. In most lenders' point of view, they think of a foreclosure as more negative to a potential borrower than bankruptcy.
Pros: Depending on the state you can stay in your property without making payments for several months this can be extended if the homeowner is also filing bankruptcy.
Cons: Negative on credit, banks could go after borrower later for any outstanding balances, reduces property values through the whole neighborhood.
If you are upside down, need a reduction in your house payment, loan modification, or have been turned down for a loan modification or refinance by your bank or credit union you should explore all possible options. Don't give up! There are countless examples of individuals that were turned down that found a solution. One recent example is a senior who had been turned down by her credit union for a refinance, she was helped by a private company to do a loan modification and reduced her payments by $500 a month.
William J. McLee has a Bachelor of Science from Cornell University, a MBA from the University of Minnesota, and a Masters in Business Taxation from the University of Minnesota. He is a featured speaker on Real Estate, Mortgages and Tax Issues. He has been featured in the Scotsman Guide, Sun Newspaper, Spokesman Recorder and Insight News. He is available for private consultation, and can be reached at (866) 636-1322 Ext #2 via e-mail at
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