When a person falls behind on their mortgage, there are options available to the borrower.
Options include Loan Modifications, Reorganization of debt through Bankruptcy
Protection, Short-Sales, Deed-in-Lieu of Foreclosure, or an outright sale of your property.
Naturally more options are available to the person who seeks immediate legal advice.
Here are a few options available to the Borrower who is struggling to make mortgage
payments:
1. Loan Modifications: If your interest rate is above six (6%) or if you are having
difficulty paying your loan, you should immediately call your lender and ask them about
their loan modification programs. There may be several loan modification programs
available to you. For some programs you do not have to be behind in your mortgage, and
the property does not have to be your primary residence. Many lenders are also
modifying investment properties.
2. Bankruptcy Protection. You can reorganize all of your debt including your
mortgage by filing for bankruptcy protection. Chapter 13 Protection allows a debtor to
reorganize their debt by giving them three to five years to satisfy their mortgage arrears
and other debt. Some debts may even be discharged altogether. The disadvantage is that
during this “repayment period” the debtor is now not only paying the regular monthly
mortgage payment, they are also making an additional payment each month towards the
reduction of their arrears. The advantage however is that during this period the bank
cannot continue to proceed with their foreclosure case. You can keep the house so long
as you keep current with your mortgage payments and the payment for the arrears. You
may also be able to avoid paying any second mortgage or line of credit completely
depending upon the lack of equity in the property.
If you are current on your loan, you may file for Chapter 7 Bankruptcy Protection and
still keep your house depending upon the amount of equity in the property. You can then
seek to have your unsecured debt (i.e. credit cards, utility bills, etc.) discharged. You
can also seek to have any second mortgages discharged again depending upon the
property’s equity.
3. Short-Sales: You can contact your lender to discuss a reduced balance to satisfy your
mortgage to enable you to sell your house. This option is known as a “Short-Sale”. In
essence if you believe that the balance on your mortgage exceeds the value of your house,
some banks will accept less than the actual balance to satisfy the mortgage. Usually
banks require that you send them a copy of a recent appraisal report showing the value of
the house and a fully executed Contract of Sale among other documents. (There may be
serious tax consequences for short-sales for investment properties which we will discuss
in the future.)
4. Sell House at Market Value. You can list your house with a realtor and sell the
house at market value. If you realize that the payments are simply too high, you can sell
your house thereby recouping any equity that you have in your house. The earlier you
make the decision to sell, the more control you have over the price, the time that you
need to move, and the amount of equity that you recoup.
3. All-Cash, As-Is Sales. You can have an investor purchase your property. The
advantage to selling to a REPUTABLE investor is that a closing of title could take place
within a few weeks. Also usually the purchase is done on an “all-cash” basis. You also
should not have to worry about making any repairs. You should demand that the investor
purchases the house completely “as-is”. Some investors will even purchase properties
with occupants. You, however, must negotiate a purchase price and any other terms that
make you comfortable. The disadvantage is that usually the purchase price is slightly
below market value due to time constraints and the nature of the sale.
4. Deed-in-Lieu-of-Foreclosure. When you fall behind on your mortgage, you can ask
your lender to accept title to your house instead of going through the foreclosure process.
Obviously you would only entertain this option when there is absolutely no equity in the
property. An advantage in this option is that the lender may accept the transfer of
ownership of the house in full satisfaction of the mortgage. A disadvantage is that most
times the lender has several conditions to the transfer (i.e., the house must be vacant).
Also there may be tax consequences resulting from this transfer which we will explore in
the future.
You must understand that simply because you are behind on your mortgage payments or
in foreclosure does not mean you cannot favorably resolve this situation. The key is to
seek advice immediately after missing a few mortgage payments in order to explore
your options. The earlier one seeks proper legal advice, the more options they have
available to them. Remember, you do have options in foreclosure.
