Many homeowners are stuck in underwater real estate that they cannot afford. Once a foreclosure process has started, many homeowners think that it is too late to do something. It’s not too late! There are many options available to homeowners of real estate in foreclosure. The following are common options that can assist a homeowner dealing with underwater real estate.
A loan modification is where you negotiate a reduced mortgage payment or reduction of principal balance owed with the lender. The lender will review your monthly income and expenses to determine if you qualify for their modification plan. Any modification agreement must be voluntarily agreed upon by you and the lender. It can take many months for a lender to offer a loan modification, and often the lender will continue moving forward with the foreclosure process while your application for loan modification is pending. The positive of loan modification is that the new mortgage payment is a permanent long term solution. If you do not have much other debt, modifying a home loan can save your credit when you don’t really need a bankruptcy. Loan modification can also save you thousands of dollars over the life of you home loan.
Allow the House to Foreclose
Many homeowners that owe far more than what the property is worth are electing to allow the house to foreclose. This is also a common option for people with drastic income losses who can no longer afford a mortgage payment and would now rather rent. For most homeowners that have just one mortgage on the property, they can let the house go into foreclosure without tax consequences and without the lender being able to sue them for any balance owed that is not collected in a foreclosure auction. It is often more difficult to let rental property foreclose without consequences then it is for a primary residence. However, it is important to speak with an attorney to be sure that there will be no tax or debt burden created from the sale of your house.
Surrender the House in Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, ALL of your debts are presumed to be discharged in the bankruptcy unless you do something that removes that particular debt from the case. If you do not sign a reaffirmation agreement removing your mortgage from the case, then when you pull your credit after the bankruptcy, the lender will report your home loan as “discharged” on your credit. Think of mortgages as have two parts: 1) the debt you owe, and 2) the security interest that the lender has in the property (this is what gives the lender the right to foreclose when you stop paying). A discharge in bankruptcy will wipe out the debt that you owe, but that does not mean that you now own your house free and clear. It’s that nasty security interest that can put the house in jeopardy in the future and allow the bank to foreclose when you don’t pay. The bankruptcy discharge will prevent the lender from collecting against you on the balance you owe. This option can be good for homeowners who are not sure they will be able to make payments long term. Also, many second mortgages are recourse loans where a lender can sue to collect the deficiency balance owed after a foreclosure. The bankruptcy discharge prevents a second mortgage from ever being able to collect.
Keep the House Paired with Bankruptcy or Debt Settlement
Many homeowners have a lot of credit card debt and medical bills that they make large monthly payments on. That type of unsecured debt is dischargeable in bankruptcy and can be settled for far less than what you owe. The monthly payments on unsecured debt can be very high and, if you are making the unsecured debt payments each month, there is less money available to pay the mortgage. By settling or bankrupting unsecured debt, it can open free up enough income on a monthly basis to allow homeowners to keep their home without having to modify the loan or get rid of the house.
Catch Up on Mortgage and Eliminate Second Mortgages with Chapter 13 Bankruptcy
Chapter 13 bankruptcyhttp://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx allows homeowners to repay mortgage arrearages over a 3 to 5 year period of time. Also, if your property is worth less than what you owe on your first mortgage, bankruptcy courts are allowing Chapter 13 bankruptcy filers to wipe out their second mortgages completely – this is called “lien stripping.” Lien stripping is not available in Chapter 7 bankruptcy cases. Chapter 13 bankruptcy is a very comprehensive solution for many homeowners because it eliminates the unsecured debt, gets you caught up on the first mortgage, and eliminates the second mortgage all in one action. However, the Chapter 13 monthly payments to the court can be quite high, and the bankruptcy court has oversight of your income and expenses for several years. Many people do not like that kind of court oversight into their lives. Consult an attorney on the pros and cons and to give you an estimate of what your court payment would be if you select this option.
Repayment Plan with Lender
Almost all lenders offer a simple 12 month repayment plan to get you caught up on mortgage arrears. This option is really just a “catch-up” plan and you do not get any discount on what you owe. This options works well for homeowners that got behind on a mortgage due to job loss or lack of income, but now have sufficient income to meet the monthly mortgage payment again.
In a short sale, the lender allows a homeowner to sell his or her property at market value. Although the sale price may be lower than the balance owed on the home, the lender agrees to it because they will have better chance at recovering their investment. By agreeing to a short sale, the homeowner will avoid having a foreclosure on their financial record. A short sale is ideal for people who want to avoid foreclosure but are sure that they are ready to give up the home. A short sale is also a good option for someone who is not eligible for a loan modification.
Settle a Second Mortgage
Many homeowners have very large second mortgages that are difficult to pay. When a property is worth less than what you owe on your first mortgage, we have a lot of success in getting the lender to negotiate a settlement to remove the second mortgage completely from the property. This helps by eliminating that big second mortgage payment and brings what you owe against the real estate a lot closer to fair market value. For homeowners with large seconds, sometimes just removing the second mortgage is enough to make the house affordable long term. Second mortgages can be settled for approximately 8 to 20% of the balance owed, depending on the home value and the lender involved.
The main thing to take with you from this article is that there are a lot of options to deal with underwater real estate. Discussing your situation with a knowledgeable real estate attorney can help.