Learn the Options for Solving Your Mortgage Problems
Nobody wants to lose their home. If you are falling behind on your mortgage payments, you may feel that you are running out of options. You need to understand that the steps you take will make a difference in what happens.
Learn about the pros and cons of the different choices you have. One basic rule is that any time that you aren’t able to make your required mortgage payment, you should contact your lender. It may not be pleasant to call them, but maintaining good communication with your lender is important. You can gain flexibility that would not be available to you were you to avoid speaking with your lender. Keep detailed and accurate records of all conversations and correspondence.
Make sure that you understand the options that will allow you to stay in your home. You may benefit from working out a home loan modification, but that is not the only way to solve the problem.
The U.S. Department of Housing and Urban Development offers a succinct definition of mortgage loan modification: “A loan modification is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford.” A homeowner will undergo a loan modification because they are in some sort of financial distress.
As implied by the definition of a home loan modification, all parties to a loan modification do so voluntarily. A loan modification is not a refinance, does not add or remove a party from the contract, or allow the homeowner to remove equity from the property in the form of cash. A loan modification has several advantages for the consumer and loan servicer. First, although the home loan modification process is unpredictable in terms of timing and outcome, it is rare for a consumer in the midst of a loan modification negotiation to be foreclosed upon. Second, a loan modification in and of itself will have no impact on a consumer’s credit score.
What you suggest is ceasing payments on your home equity loan, which will cause the loan servicer to transfer the loan from its current accounts file to its bad-debt ledger. The Federal Office of the Comptroller of Currency, in an attempt to prevent banks from inflating future earnings statements with old and defaulted accounts, requires that a creditor write-off/charge-off a debt after approximately 180 days and move the account to a bad-debt ledger. It does not mean that the consumer no longer owes the debt. Despite what it sounds like, an account being charged off does not forgive the consumer for liability for the debt in question. Creditors can continue their collection efforts to secure payment on charged off accounts.
A loan settlement has pros and cons. The pro is that a successful settlement can be for a small fraction of the balance of the loan. The cons are significant. The bank may foreclose if the consumer becomes delinquent. The chances of a foreclosure depend on the individual circumstances of each case. If for example, the creditor holds a second or third mortgage, and the balance of the senior mortgages exceeds the fair market value of the property, then there is no economic intensive for the creditor to foreclose. Second, the creditor may not negotiate reasonably. Finally, because the consumer must default on payments to drive his or her account into write-off status, this fact will almost certainly be reported on the consumer’s credit report, which will drive down the consumer’s credit score.
Defaulting on payments to drive your home equity loan account into charge-off status is a risky strategy, a
Another option is to file for Chapter 13 bankruptcy, which will allow you to retain possession of your residence and have the lien for the home equity loan stripped from the property. Consult with an attorney in your state who has experience in bankruptcy to learn if this option addresses your needs.
Sometimes, foreclosure is inevitable. You could end up stuck with a mortgage deficiency balance or not, depending on the state you live in and the type of mortgage you have.
Sometimes, there is no better option than selling your home to avoid a foreclosure. There is an option that is in between foreclosure and trying to keep up with your payments, the short sale. For more on this option please click here. We at the Johnson Team are here for you to help you with your exit strategy. (Please consult a tax adviser prior to making any financial decisions)