In today’s housing market it is not at all unusual to find homeowners holding property which has been significantly devalued. In many cases, the remaining amount owed on the mortgage is now significantly above the actual value of the home. In other words, the loan-to-value ratio is now over 100%, despite months or years of payments. This is known as being “upside down” or “under water” on the mortgage, and results in the homeowner being unable to pay off your mortgage just by selling the property.
In addition to this, based on the economic conditions and job markets of today, many borrowers find themselves behind on their mortgage payments. When these two conditions combine, homeowner’s choices begin to narrow rapidly.
While the particulars vary by property owner, generally there are four options available for getting out from under an upside down mortgage, which include:
- Loan modification and/or payment plan
- Sell the property and/or short sale
- Deed in Lieu of Foreclosure
- Foreclosure
A loan modification or payment plan is the most straightforward method of solving a problem of falling behind on payments. These options also have the added benefit of enabling the homeowner to stay in the home. In order to obtain a payment plan or loan modification, the homeowner would contact their lender and work directly with them. No attorney needs to be involved. The lender would lay out the requirements that the needs to meet and it would be the homeowner’s responsibility to show that they meet the requirements. If you have a temporary lack of funds, they may be able to set up a payment plan where you pay less for a few months and make the difference up later. Payment plans are most common with issues of temporary unemployment, illness, or other issues which result in a short-term lack of funds. If, by comparison, a homeowner is not expecting to be able to make up the payments later, a true loan modification may be necessary. This is an option where the bank agrees to lower the interest rate or make some other change to the loan, in order to make it more affordable to the homeowner. The bank would do this if they believe they would make more money in the long run by reducing the interest rate or balance, than they would if the loan failed and went into foreclosure.
If the homeowner’s financial situation is more serious and a reasonable reduction in monthly payments will not help, it may be difficult to stay in the property. The question then becomes how to best leave the property. How will the homeowner leave with the most money, the least debt, and best credit rating, possible. A homeowner will want to get the property on the market as soon as possible. The best idea is to get the property on the market before the lender starts sending notices of default or of foreclosure. Recognizing that the mortgage is under water, the home will likely have to go through the short sale process. The homeowner will again have to work with the bank, making them aware of the situation. If a deal has been made with a purchaser, the sale price will not cover what is owed on the mortgage, and the money is not available to cover that difference, the bank will have to be convinced to forgive the remaining debt. This is the very definition of a short sale. A homeowner will most certainly want to have an attorney assisting you at this point, as negotiating with the bank can be a long and complicated process, requiring the homeowner to submit significant personal and financial information to the bank.
Finally, if the bank will not agree to a short sale, or if a purchaser is unable to be found, a homeowner may decide to consider a Deed in Lieu of Foreclosure, or the Foreclosure process itself. A Deed in Lieu of Foreclosure is, in short, a process in which the homeowner turns the home over to the bank voluntarily. The bank would then forgive the remaining amount owed under the mortgage. This also avoids the long and hassle-filled process of dealing with an actual foreclosure, and may not harm your credit to the same extent. The foreclosure process itself can be long and draining to both a homeowner and their credit report. Please check back later for a future article detailing the foreclosure process.
No matter what process a homeowner chooses, they should not delay in making or enacting their plans. Homeowners should contact experienced attorneys as soon as possible to discuss the best course of action in any particular case.