The general downturn in real estate, and the issues in the sub-prime market, has led to some of the harshest financial conditions facing homeowners in years. Many homeowners are also facing the more specific dilemma of increases in their adjustable rate mortgage payments. As a result, many homeowners are falling behind and face the prospect of foreclosure. If you are in that position, there are several alternatives available to you.
First Things First
Contrary to popular belief, the bank/mortgage lender, does not want your house. Rather, they want the stream of payments that you agreed to when you borrowed money from them. Accordingly, mortgage lenders are interested in avoiding foreclosing on your home. However, you need to bring money to the table when dealing with your lender.Basic Alternatives to Foreclosure
- Refinancing - If you are currently in an adjustable rate mortgage, and you have a decent credit score, a good solution for you to consider is refinancing into a fixed rate mortgage. However, be mindful that you may be required to contribute a down payment in order to get into the fixed rate loan.
- Modification - If you have fallen behind, you should consider working out a modification to your loan with your lender. In many instances, the lender will allow you to tack the missed payments onto the back end of your loan so long as you continue making the remaining mortgage payments as they come due. Other ways to modify your loan include reducing or fixing your interest rate, stretching the loan out over a longer time span, or through a forebearance.
- Repayment plans - Under one typical approach, the amount of the arrearage is divided up into twelve equal parts and repaid over a period of one year. The second variation often requires a lump sum payment to the lender in the amount of one-half the past due amounts, with an increase in your monthly mortgage until the balance is paid in full.
- Selling - Selling your home can protect your credit score and/or free up room in your budget for other items. Be prepared to market your home aggressively in regards to the price. If you do sell, you may able to rent a similar size home for less than you were paying on your mortgage.
- Short-selling - A short sale occurs when a buyer seeks to buy your home for less than what is owed on the mortgage and requires agreement from the lender. However, keep in mind that a short-sale takes a much longer time to complete and may result in 1099 income and results in tax consequences. Under certain conditions, this 1099 income can be avoided (as under the Debt Relief Act of 2007). Consult with a knowledgeable attorney on this before agreeing to the short-sale. One of the advantages you are bargaining for in a short sale is a release of liability from your lender. This release must be in writing and your sales documents must be drafted carefully by your lawyer.
- Deed in lieu - Here, you essentially agree to give (deed) your house back to the lender in return for the lender deeming that the loan is fully satisfied and releasing the borrower from any further liability on the loan. Be sure to negotiate this essential term in writing with the lender prior to executing the deed.
- Bankruptcy - In some instances, bankruptcy can assist in keeping your house. Whether this is possible, and whether it is in the best interests of the homeowner requires a fact-specific analysis. Consult with a knowledgeable attorney if you are considering this option.
- FHA - Homeowners with FHA loans have additional remedies available to them. Contact the FHA directly to discuss your options.
If you are facing difficulties with your mortgage payments, do not hesitate and do not be passive. You need to take affirmative action which includes informing yourself of the viable alternatives, communicating directly with your mortgage lender, making some tough decisions, and, in some case, speaking with an attorney. If we can be of assistance in this regard, please contact our office or call 602-277-4441 to schedule a free consultation with Platt & Westby, P.C. Finally, if you do reach any agreements with your lenders, be sure they are put into writing.