Perhaps you’ve been out of work for a few weeks. Or months. Or even years. Perhaps you got sick and you can’t work. Maybe you got transferred and you couldn’t sell your home when you moved and you rented it and now the tenants aren’t paying the rent so you can’t make the mortgage. Maybe the economic downturn or Great Recession or whatever you want to call it is causing you to make less money than you used to. Whatever the reason, you’re behind on the payments and you either don’t have the cash or you don’t have the equity to sell the home to pay off the amount you owe. The bank is calling and they’re talking about the “Acceleration Clause” in your mortgage. So you have to pay the full amount or they are going to foreclose. Now it’s crunch time- you have to do something. But what? What do you do? You are what we refer to as a “Distressed Homeowner” and the distress is making you lose sleep. At the very least.
Before you panic, remember- you have options. You do not have to have a foreclosure on your credit or be homeless. Here are a few options that you have.
- Reinstatement- If you can pay your missed payments, late fees and any legal fees, you can have your mortgage reinstated. That is, the mortgage holder will tell you the amount you are behind, you pay it and the “Acceleration” clause disappears and you are free to make payments just like before. Sort of a Forgiveness- you catch back up, they pretend it never happened.
- Forebearance (re-payment plan)– The mortgage holder agrees to reinstate your loan and either adds the missed payments and fees to your current payment or sticks them at the end of the loan. This does happen, although it is rare, and you will have to show that you have the ability to make the new payment or the original payment.
- Sell the home– Pretty obvious. If there’s enough equity in the home based on a Comparative Market Analysis (CMA), you can sell the home and use that equity to pay off the loan and the legal fees. I will happily give you a free Market Analysis if you need one.
- Rent the home– If your payments are low enough, you can rent the home for more than the mortgage payment. Include all taxes and insurance (if they are not escrowed already) and your Homeowner’s Association (HOA) payments, if any. This, of course, comes with its own set of obstacles, including but not limited to maintenance, tenant screening, security deposit laws, non-payments and evictions, and possible damage to the home. If this is an option, I also know a Property Manager who can help you determine the rental value of your home.
- Short Refi– Relatively new, it is a fully documented qualification procedure and will involve showing hardship and qualifying for the new loan.
- Mortgage Modification– This is a lower interest refinance where the mortgage holder lowers the interest rate on the current loan. If you can show proof of income and expenses, you may qualify for this option as part of the Federal Government’s Making Home Affordable effort. There are several different kinds of loan mods, including the Home Affordable Modification Program (HAMP) and the 2nd Lien Modification Program (2MP). If do not qualify for these modifications or there are missed payments during the modification, the Home Affordable Foreclosure Alternative (HAFA) guidelines will help stream line the process of a Deed-in-Lieu or Short Sale. HAFA may also help with relocation assistance if you have gone thru a HAFA short sale.
- Deed-in-Lieu of Foreclosure– Sometimes called a “friendly foreclosure,” a Deed in Lieu (DiL) means you essentially give the mortgage back to the bank. This avoids a lengthy foreclosure process and additional legal fees. Ideally you would negotiate away any deficiency judgement and the bank agrees to no further recourse. Works best with one mortgage holder and a very small mortgage.
- Refinance– If your credit has not been too badly damaged, and the home will appraise for the appropriate value, you can refinance the home as long as the reason for being behind on the payments has been resolved, such as being temporarily out of work.
- Bankruptcy– Yes, there is this. Yes, it can be done. I honestly cannot discuss since I am not an attorney. Only a qualified Bankruptcy Attorney can give you advice on this subject. If you’re thinking about Bankruptcy, please have an attorney help you- it is complex and the laws may differ state to state. Keep in mind that a short sale can still be a possibility.
- Servicemember Civil Relief Act– Are you Military? Did you buy your home and did your mortgage begin before you went on active duty? Does your service to our country affect your ability to repay your loan? If so, you may find temporary relief under the SCRA. This may include mortgage relief, termination of leases, protection from eviction, and more.
- Homeowners Assistance Program (HAP)– In towns where a base has closed, the Department of Defense (DoD) has a program to help if you are selling in an area where the values of homes have dropped due to a base closure or “realignment announcement.” Because of the American Recovery and Reinvestment Act of 2009, it has recently been expanded to help servicemen and women who have been wounded or become ill while deployed, and it help surviving spouses and even civilian employees as well.
- Short Sale– If you owe more than the home is currently worth, and none of the other options above can work for you, then it is time to pursue a short sale. A Short Sale is negotiating with your mortgage holder to take less on the property than what is owed. For a full explanation of a short sale and how it works, I have a video here that explains it.
So you see, there are things that can be done. You might be able to stay in your home or at the very least avoid having a foreclosure on your credit report. The Fair Credit Reporting Act says that it can stay on your credit for seven years. But if you work hard to avoid that foreclosure your credit will heal sooner and you may be able to purchase a new home in as little as 2 years. That’s a big difference. And it might make a big difference for you.