Homeowners often find themselves unable to make their monthly mortgage payments. This can be due to losing a job or income source, or by an unexpected increase in expenses for medical or other reasons. Delinquent mortgage payments means you are at risk of foreclosure, resulting in the bank taking your home and evicting you. Foreclosure will damage your credit, making home ownership unlikely in the future.
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Alternatives to foreclosure exist that protect your credit and prevent the bank from seizing your home:
Fast Home Sale. The easiest way to avoid foreclosure without hurting your credit is to sell your house fast, and use the sale proceeds to pay off your mortgage. This works when the house’s value is higher than the outstanding mortgage debt. If your house sells for more than the outstanding mortgage debt, pocket the remainder. Sell directly to an investor like Kind House Buyers for a fast no-hassle cash sale, or list on the MLS if the property is in good condition and you can afford to wait.
Short Sale. Short sale means selling your home for less than the outstanding mortgage debt. Short sale is your only sales option when your house is “underwater”, i.e., the market valu
e is less than the outstanding mortgage debt. Unlike a regular home sale, the mortgage holder (typically the bank) must agree to the sale and release your debt obligation. “Approved” short sales occur when the bank approves a sale at a specific price before a buyer is found, and “unapproved” short sales occur when you first find a buyer, and then present the sale for approval to the bank. Beware of deficiency judgments – some states such as Florida allow lien holders to file a lawsuit to obtain a judgment for amounts owed not covered by the short sale.
Loan Modification. Loan modifications are written agreements with the mortgage holder to change the terms of the loan, such as interest rate, monthly payment, and maturity date. A common modification is “refinancing”, which is essentially trading in your old loan for a new one with a new interest rate, maturity date, monthly payment, or even a new balance. Refinancing makes sense to take advantage of a lower interest rate (particularly given today’s historically low interest rates). Refinancing to a lower interest rate can lower your monthly mortgage payment to a number you can afford.
Banks may allow you to you to “stretch out” the maturity date of your loan in exchange for a reduced monthly payment. Although you will pay more to the bank over time, extending the maturity date will lower the monthly payment. Also inquire about an “interest only” option. An “interest only” agreement would allow you to only make interest payments during the “interest only phase”, and then you begin to make larger monthly payments during the “amortization phase.” An interest-only arrangement makes sense if expect you will be able to pay the full mortgage payment in the future.
The federal government has passed legislation to make loan modifications easier on homeowners. Under the Home Affordable Modification Program (“HAMP”), mortgage payments can be reduced to 31% of the homeowner’s monthly gross income. The Home Affordable Refinance Program (“HARP”) allows homeowners with Fannie Mae/Freddie Mac owned-mortgages to refinance underwater homes. The Home Affordable Unemployment Program (“UP”) provides temporary reduction or suspension of mortgage payments for up to 12 months while you seek a new job.
Negotiation of a Payment Plan. Banks will negotiate payment plans with homeowners behind on their mortgage – it’s easier than foreclosure litigation. Commonly, banks allow you to spread out missed payments over time, or make up missed payments by extending the maturity date. Banks also sometimes enter “forbearance agreements”, where mortgage payments are suspended during a “forbearance period” but the homeowner must bring the loan current at the end of the forbearance period. Forbearance agreements can last up to a year. Although the bank may say no, you can ask for forgiveness/waiver of missed mortgage payments.
Deed In Lieu of Foreclosure (a.k.a. Mortgage Release). “Deed in lieu of foreclosure” (or “mortgage release”) is the voluntary transfer of home ownership to the mortgage holder in exchange for discharge of the outstanding mortgage debt. Mortgage release is fast, efficient, and you can begin working on improving your credit score. Some mortgage holders – including Fannie Mae and Freddie Mac – provide relocation incentives and assistance to qualified homeowners after a mortgage release. Similar to short sales, beware of a bank seeking a deficiency judgment (in this case, the difference between fair market value of the property and the outstanding mortgage debt).
Lease/Rent. Avoid foreclosure by renting the home for profit sufficient to make the monthly mortgage payment. Make sure to account for the various expenses that accompany leasing: maintenance, vacancy, taxes, insurance, and utilities. Contact a qualified leasing agent to determine how much your property will rent for. You can see local rental rates on Zillow, Craig’s List, and Rentometer.
Bankruptcy. Bankruptcy is a last resort – it will damage your credit, requires an attorney, and leads to forfeiture of most if not all assets. However, in Florida, you may be able to keep your home even through bankruptcy. Speak with a qualified bankruptcy attorney about Chapter 7 vs. Chapter 13 bankruptcy. Under Florida’s Chapter 13 bankruptcy, the court confirms a payment plan with you that begins when bankruptcy litigation finishes. As long as you meet the terms of the payment plan, you are protected against foreclosure. The disadvantage of Chapter 13 bankruptcy is that you will need to use your post-bankruptcy income to satisfy the payment plan. Florida’s Chapter 7 bankruptcy will not grant any protection against losing your home. The advantage with Chapter 7 is that you get a “clean slate” and can keep post-bankruptcy income.
If you are facing foreclosure, carefully investigate and consider all of the options. Feel free to contact Kind House Buyers if we can provide any assistance in understanding foreclosure or real estate concerns you may have. Don’t wait till the last minute!