Just a few years ago, residential property prices were at an all time high. Loans to finance the American dream of homeownership were plentiful and easy to qualify for. Today, home values have plummeted in most parts of the country. Even with interest rates at a record low, financing approval for purchase or refinance is hard to come by due to lenders toughing their qualification requirements. Many homeowners have experienced their mortgage payments double or even triple as adjustable "teaser" rates reset to higher rates. Recession coupled with high unemployment rates has decreased, or sometimes eliminated household income. It is no wonder that the average homeowner found him/herself behind on payment, in default, or even facing foreclosure. However, it is important to remember that there are options available. With proper education and professional assistance, distressed homeowners can rebound and get back on track to financial prosperity.
In this article, we will explore a few of those options together. In Part 1, we will discuss options in which homeowners will be able to keep their property. In Part 2, we will discuss the options when unfortunately keeping the property is not possible.
*Please note that the options below are not the only options available and are subject to change along with the continuously evolving economic environment. Also, there is no guarantee that any one option will work for you because all cases are unique to the individual's situation. So always seek competent professional counsel (Legal, accounting and etc) before attempting the following options.*
Part 1 - Options that can save your home!
Option 1. Do Nothing
We are starting with this option because it is the starting point for most distressed homeowners. Surprisingly, it is also the option many of those homeowners end up with without proper education. This unfortunate mistake usually happens due to emotional trauma such as shame, regret, and loss of hope which paralyzes homeowners from discussing financial difficulties or seeking options to remedy the situation. Doing nothing is a sure-fire way to foreclosure and financial ruin. Remember that your ability to act and seek education is the most powerful weapon you can have to recover from financially difficult times.
Option 2. Refinance
Most homeowners will be familiar with this option. If you have enough equity in your property, are able to obtain interest rates lower than the rate currently on your mortgage, and found a lender willing to qualify you, this option should be right for you. This will effectively lower your monthly payments to a level you are comfortable with. However, most distressed homeowners today have no equity or even negative equity in their property. Also, they might be in hardships such as job loss and cannot qualify to refinance. If that is the case, then we must move on to the next option.
Option 3. Loan Modification
Loan Modification is a great option for homeowners with negative equity, behind in payments, in default, or facing foreclosure. Many distressed homeowners will be happy to learn that Loan Modification has become increasingly popular lately with lenders who are beginning to streamline the process. Government programs such as HAMP (Home Affordable Modification Program) are attempting to save more distress homeowners through Loan Modification.
Loan Modification differs from refinance in that instead of getting an entirely new loan, Loan Modification restructures your existing current mortgage with more favorable terms. This can be anything including temporarily lowering the amount of your monthly payment, lowering interest rates, increasing the amortization period, or lowering the principle. Let's say that your current mortgage has a 7% adjustable rate with a 20 year amortization period and a balance of $ 250,000. A Loan Modification may lower the rate to a 5% fixed rate, increase the amortization period to 30 years, drop the balance to $200,000, or even a combination of any those examples. However, the lenders will not go out of their way to inform you that this is possible. Different from refinancing, Loan Modification is a negotiation intensive option. In approving a refinance, lenders have publicly advertised guidelines such as minimum income ratio or credit score. In a Loan Modification, everything must be aggressively negotiated and therefore, it is not recommended to attempt this option on your own. It is essential to seek competent professional help.
A good Loan Modification Company will have a proven track record and a solid guarantee of their work. They will also have intimate knowledge and experience with the various mortgage documents. Some of Loan Modification companies go as far as conducting a forensic audit on your mortgage documents. A Forensic audit means meticulously combing through the loan documents to find errors, anomalies or violations that can be leveraged in the negotiations with the lenders. Many companies offer Loan Modification services but they are not all equal. Do your research and choose a Loan Modification company carefully.
With just a little education, distressed homeowners will start to realize that their choices are many and not limited to the options presented in this article. In fact, we can reasonably expect that new options will be invented and existing options will be refined as the nation moves toward financial recovery. Another encouraging fact is that several options available can be attempted in succession. If Refinancing did not work, Loan Modification can be attempted next and so on. As long as the homeowners seek options and take action, financial recovery is just a matter of time.
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