Workout Options
There are a number of workout options banks will consider to rehabilitate mortgages for homeowners in trouble. By contacting your lender and attempting to work out a solution, you only help yourself. Lenders appreciate borrowers who try to work with them, and are less likely to foreclose if the borrower contacts them with a workout plan. While they don’t accept all workout plans, most banks are willing to negotiate a solution to your situation if at all possible.
One of the worst things you can do is refuse to communicate with your lender. As long as you’re talking, you are in a very good position to salvage your home loan and save your home or at least your credit rating.
If you refuse to communicate with your lender, the chance that they will foreclose is basically 100%.
There are various workout options available, and one of them may be useful in your situation.
You may be able to talk to your bank about a forbearance if your situation is temporary and you expect a lump sum of money to bring the debt current in the near future. In a forbearance, the lender agrees to suspend payments for a specified period of time, with the understanding that you will bring the loan current and continue your regular payment schedule at the end of that time period.
The lump sum money could come from a number of sources, such as an employment bonus, insurance settlement, or tax refund. If you are expecting a payment, and know that you will be able to make your mortgage obligation in the future, you may qualify for a forbearance.
Forbearances are usually used in conjunction with a reinstatement, which literally means reinstating your existing loan, which you continue to make payments on as before after curing the default and bringing the loan payments current.
If your situation is temporary but you do not have a lump sum payment coming in to qualify for a forbearance and reinstatement, you may be able to qualify for a repayment plan. In this type of arrangement, you will make your regular monthly payment on schedule, along with an additional payment each month to pay off your overdue balance.
If your financial situation is permanent, and you do not expect to be able to make your monthly mortgage payment in the future, you may still have options to either salvage your mortgage or get out of your loan through sale.
One option available to borrowers is a mortgage modification. You may be able to negotiate, for instance, an extension of your mortgage. This extension would lower your payments while keeping the interest rate the same. In an extension, you would pay your mortgage off over a longer period of time, thus paying more interest in the end, but rehabilitating your mortgage now and saving your home.
Another option for rehabilitating a loan when your financial situation is permanent is to ask the bank to lower your interest rate. While this does not sound like a promising solution, banks can and do modify mortgages in this way when the alternative is to foreclose on the home.
Banks want to negotiate workouts for failing mortgages. They do not want the home; they want the borrower to pay their mortgage. Many lenders will go to great lengths to help mortgage borrowers who are in financial difficulty but are sincerely trying to save their home.
If you contact your mortgage lender and talk with them honestly about your situation, presenting a plan for how you can save the mortgage and avoid foreclosure, most lenders will give you a fair hearing and try to work with you to resolve the situation.
If you cannot resume payments on your loan, even at a reduced rate, your bank may be willing to consider a short sale, in which you sell the home for an amount less than you owe, and the bank accepts the sale amount as full payment of the mortgage. This is often more difficult to arrange than other workouts, but lenders will accept short sales in certain circumstances, and if the only other alternative is foreclosure, asking for a short sale cannot hurt your situation.
Other Options
Homeowners who are not able to pay their mortgage or sell the home in a short sale may consider renting the home. Ideally, you would be able to rent the home for an amount that covers your mortgage. However, even if the rent falls short of your monthly mortgage payment, if you can make the mortgage payment between rent and your regular income, while renting yourself, you may be able to sell or refinance the home at a later time, when the real estate market has recovered from the current crisis.
Renting your home in order to save it may seem strange, but as long as you make the payments and remain in possession of the home, there is always a chance that your financial situation may turn around, and you do not have a foreclosure on your credit record.
If you are unable to sell your home short or rent it, you may be able to find someone to assume the loan. Be very careful that you actually are executing an assumption, and that your bank is involved in this takeover of your loan. Some scammers will make you believe they are paying off your loan, leaving you with no home and a mortgage payment. A true assumption will sell your home to a new owner who assumes your current loan legally. You will no longer own the home or be responsible for the mortgage, and there will be no foreclosure on your credit record.
If the bank must foreclose, and there is no way to avoid it, you may be able to do a little better, as far as your credit report is concerned, by giving the home back, using a deed-in-lieu-of-mortgage process, rather than forcing the bank to file a foreclosure lawsuit against you. This is a traumatic situation, and you will still experience a foreclosure, but it may be a less traumatic process than the alternative, and your credit report may read differently than if the bank is forced to foreclose through legal channels.
Why Not Just Walk Away?
Deed-in-lieu may sound a lot like simply walking away from the mortgage, but there is a big difference. During this current mortgage crisis, many people are, indeed, walking away, not paying their mortgages, and just letting the bank take over.
The thinking seems to be that if you can’t pay your mortgage, you should just save the money, or spend it, find a place to rent, and let the bank foreclose on the home.
Walking away from a mortgage is the single most damaging thing you can do for your credit. In fact, if you walk away from a mortgage with the intention of renting an apartment, it would be best to line up the apartment while you’re still paying the mortgage. Most complexes check credit references very carefully, and it will be difficult to find a rental if you’ve walked away from the most important financial obligation you’ve ever made.
Your entire credit rating will suffer for many years as a result of walking away, and you may even find that employers who check credit ratings will not hire you or promote you if you’ve walked away from a mortgage. Abandoning this obligation could seriously impair your ability to live your life as you choose for years to come.
The Most Important Thing Homeowners Can Do
Most homeowners, when they start receiving overdue notices from their lender, stop opening their mail. This is a serious mistake. Most lenders understand that people have financial problems from time to time. They are usually willing to work with homeowners who are sincere about repairing their mortgage and resolving their situation.
The best thing you can do is contact your mortgage lender about a loan workout. There is probably something the lender can do to help you either save your home or get out of your loan without foreclosure, and they are willing and usually able to help with this process. By talking with your lender and working out a solution acceptable to both of you, you may be able to save your home. You can usually at least avoid foreclosure, and that is one of the best moves you can make for your future.
