What to do if You are Behind on Your Mortgage Payments

Real Estate Agent with Compass Realty PB20701793

Thinking about selling because you can't afford your home anymore? Well, you aren't alone. The good news is that you have options. With homeowners giving their homes back in record numbers due to irresponsible lending practices of our industry the government has stepped up to the plate for us (finally). I have compiled a list of various options that you can look into or give me a call about any of these to get additional information. I will do anything I can to help you out.

If you are in a compromising situation - before making a decision - please consult with me, your mortgage company or someone in the industry so you can make an informed decision with a field expert.

Short Sale
What is a short sale? A short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's Loss Mitigation Department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, a short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.

More Information to Know
When/if the lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed. For example, if you owe $130,000 on your home and sell it for $90,000 you will actually be 1099'd (income earned) for the $40,000 difference and will have to pay taxes on it.

However, (here's the good news) after the signing of The Mortgage Forgiveness Debt Relief Act of 2007 by President Bush, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences so consultation with a tax advisor is necessary ensure that a borrower qualifies.

If you are considering a short sale check with your lender as you will need to provide them certain information such as a hardship letter outlining your situation, a budget letter outlining your current financial obligations and various other items that are investor specific.

Short Refinance
The refinancing of a mortgage by a lender for a borrower currently in default on his or her payments. This is done to avoid foreclosure. Typically, the new loan amount is less than the existing outstanding loan amount and the difference is typically forgiven by the lender. A lender might do this because it is more cost effective than foreclosure proceedings.

Why Would a Bank Do This?
Foreclosure is an expensive solution for a lender for loans in default; not only does the lender not receive any payments for up to a year, but it may lose out on fees associated with the procedure. A short refinance is just one of several alternatives that might be more cost effective for the lender. It also allows the borrower to keep his or her home. Other potential solutions are entering into a forbearance agreement or a deed in lieu of foreclosure.

Sell It To An Investor
Many times an investor may be available to purchase your home for cash depending on how much you owe and how much your home is worth. Obviously, they are looking to "invest" so they are looking to purchase the home below market value. This is dependent on how much you owe and if you are willing to take less for your home to avoid a credit disaster.

A situation in which a homeowner is unable to make principal and/or interest payments on his or her mortgage, so the lender, be it a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.

In some cases, to avoid foreclosing on a home, creditors try to make adjustments to the repayment schedule to allow the homeowner to retain ownership. This situation is known as a special forbearance or mortgage modification.

The bank will start this process if you have not made any contact with them to make other arrangements and you are 3 months behind on your payments. Contact your lender before you get to this!

HUD Backed Loans (FHA Loans)
There is an option that you can use that our government has put out to help stop the bleeding. You can visit the website here or call their 800 #: 1-800-995-4673. This website also has links posted for Fannie Mae and Freddie Mac. They have an alt website as well which is www.995hope.org.

In Summary
I really hope this helps anyone that is lost or confused by what your options are. I am very willing to do what I can to help anyone out. We are located in the Indianapolis market and provide services to all Metro areas of Indianapolis.  Visit our website to learn more about us!

Comments (2)

Annie Brunson

Everyone seems to agree that flooding the market with empty, foreclosed homes does not help neighborhoods maintain stability – either as a way of living, or regarding the value of homes. Empty homes do nothing for a neighborhood.

Recently some organizations are taking tentative steps to allow homeowners who are defaulting on their mortgage to remain in their homes –at least for the time being.

Fannie and Freddie Mac have announced that they are freezing foreclosure sales until after the new year while they review strategies and the future of their organizations. J.P. Morgan Chase & Co. and Citigroup Inc. recently announced foreclosure-prevention programs that aim to reduce interest rates, extend repayment schedules and, in the case of Citigroup, reduce loan amounts, to help borrowers keep their homes. But the programs have focused primarily on loans wholly owned by those companies because they feel they have more authority to rework those mortgages.

HSBC is also making more options available to more people. For example, it is contacting customers before their adjustable-rate loans reset to higher rates and freezing the current rate or allowing the borrower to pay a rate below what the new rate would be. The bank also is lowering fixed rates for selected borrowers. All this in an effort to stave of foreclosures.

One way of stabilizing markets where supply exceeds demand is to regulate supply. That way the people who can buy homes can buy from sellers who can’t afford to stay in their current home. But, amazingly enough, new home construction is still going on – even in saturated markets. Merrill Lynch economist David Rosenberg suggests, only half-jokingly, that the Treasury should impose a moratorium on home building. "It sounds like lunacy, but we have to destroy the housing capital stock to help put a floor under the market," he said.

Annie Brunson, <a href="http://www.homebuyersusa.com">homebuyersusa.com</a>



Nov 21, 2008 10:54 AM
What a great comment!!!!

Annie, first off - you rock! Thank you for a well thought out and very well educated response. I really hate blogging because trolls always spam it with uneducated responses and yours rocked!!!!! - Thank you!

As  for a rebuttal (which is not a disagreement) I would say that you are completely correct and I would add that I am completely shocked and dismayed by the lack of order by our local government.

This is pretty much unrelated on a local level but I want to share due to the relevance of our market.

I recently went to sell a "spec" home by Centex homes. They offered a 7% commission to sell the home. I wrote the contract (which was accepted) and my buyer made application with their preferred mortgage company for a "great deal" as advertised by their own community rep (CTX Mortgage - a company they own). I have been aware of many great transactions between them and many home builders but during this transaction I feel they failed to deliver a "manageable" transaction.

First, they tried to negotiate my commission AFTER they offered a 7% commission to sell that home. That put me in a weird position of looking out for my client's best interest or my own.  I chose my cients best interest - OF COURSE! Is that normal for a builder to re-nig on their posted commission? I felt that was out of place to put the representative in an out of place position of saying have your buyer pay your commission?!

Regardless, this post was to help others - not myself - so let me get back on the subject. Some lenders are trying to help home owners but most are not. If someone needs help please contact me or someone else here for assistance so we can do what we are here for - HELP HOME OWNERS!!!

Nov 21, 2008 01:13 PM