Banking and Finance » Dealing with Financial Difficulties... How To Save Your Home
Dealing with Financial Difficulties... How To Save Your Home
People who have financial difficulties may find themselves in a
situation where they know they can't continue making their
mortgage payments.
If that happens to you, come up with a game plan before you
become delinquent. Here are the major components of such a plan:
* Document your loss of income. This will position you to
demonstrate to the lender that your inability to pay is
involuntary, should this be necessary later on.
* Estimate your equity in the house. Your equity is what you
could sell it for after sales commissions and paying off your
mortgage. This will help you develop a strategy for dealing with
the lender.
* Determine realistically whether your financial reversal is
temporary or permanent. A temporary reversal is one where, if
you are provided payment relief for up to 6 months, you will be
able to resume regular payments at the end of the period and
repay all the payments you missed within the following 12
months. Prove your case for the reversal being temporary in
writing.
If you can't meet these conditions, your financial reversal is
considered permanent by the lender. If the change in your status
is permanent, it means that you can resume regular payments only
if the payment is permanently reduced. This requires modifying
the loan contract: reducing the interest rate, extending the
term, or both. You need to understand the position of the
lender.
While some actions you can take on your own, such as selling
your house, other actions have to be negotiated with the lender.
You do better in any negotiation if you know where the other
party is coming from.
The lender's main objective is to minimize their loss, of
course. The action that minimizes loss to the lender depends on
the equity you have in your house, on whether your financial
reversal is temporary or permanent, and on whether or not you
are dealing in good faith with the lender.
Let's say you have substantial equity in your house. If you do,
the least costly action to the lender may be foreclosure.
While foreclosure is costly, the lender is entitled to be
reimbursed from the sales proceeds for all foreclosure costs
plus all unpaid interest and principal. They know they won't
lose any money on the deal.
While foreclosure makes the lender whole, it's a financial
disaster for you. Your equity is gone, you incur the costs of
moving, and your credit is ruined. You should always avoid
foreclosure even if it means selling your house.
If your financial problems are temporary, and you can persuade
the lender they are, the lender may be willing to provide
payment relief. The lender will probably prefer to keep your
loan rather than to foreclose on it. The burden of proof is on
you in this situation to demonstrate that the relief will really
work.
If your financial problems are permanent, sell the house before
you begin accumulating delinquencies. In a high-equity
situation, there is little hope that the lender will agree to
modify the loan contract, so don't waste your time trying. Get
out while you can. If you sell, at least you retain your equity
and your credit rating.
If you have little or no equity, and your financial problems are
temporary, it will be easier to persuade the lender to offer
payment relief. With no equity, the foreclosure alternative is
more costly to the lender.
If your financial problems are permanent, the lender probably
will be willing to accept either a "short sale" or a "deed in
lieu of foreclosure." With a short sale, you sell the house and
pay the lender the sales proceeds; with a deed in lieu of
foreclosure the lender takes title to the house.
In both cases your debt obligation usually is fully discharged.
(It does appear on your credit report, but it's not as bad a
mark as a foreclosure.) The lender who can get all or most of
his money back in these ways probably will not be willing to
modify your original loan contract. Remember, they just want
their money.
If your equity in the house is negative (you owe more than the
house is worth) but you want to remain there, the lender may
give you payment relief, or make a contract modification if
necessary to make the payment manageable. With negative equity,
these may be the least costly options for the lender.
Your Mortgage Advisor may be able to help you with your
situation and it is always a good idea to sit down and talk with
people that can help you through your difficult times.
About the author:
Gus Skarlis is the only person in America that can get you the
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