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Protection for Your Home During the Financial Crisis
By: Alex M. Rechenmacher
With an economy that is as
difficult as it is unpredictable, many have found themselves under great
financial strain the last two years. While many families may be often
overwhelmed by debt, it is important to understand your options, and to react
quickly to the problems that can face your own budget.
Understand Your Options to Prevent Foreclosure or Judgment
Paying off and reinstating
your mortgage might not be the only way out of having missed payments on a
mortgage. The financial crisis isn’t just hurting consumers; it is also hurting
the lenders, who have shifted a large amount of their resources from collection
efforts to simply mitigating their losses. This is truly a change in the
marketplace. During this unprecedented crisis, lenders have developed new
responses to reduce their losses and remove bad accounts from their records.
Pursuing a foreclosure costs unrecoverable money and time.
Keeping Your Home – “Retention” Options
Homeowners worried about
their making their mortgage payments, but truly want to keep their home have
three options generally open to them. First, the bank or servicing agent may be
willing to work out a repayment plan on the deficiency that is practical for the
homeowner and acceptable to the bank. Second, the two sides can enter into a
written agreement (known as “forbearance”) which reduces or suspends payments
for a period of time, then resumes payment at a “catch up” rate later. Loan
modification is the third option, where the bank or servicer agrees to change
the terms of the loan itself (such as interest rate, structure or principal),
and is most preferable if financial hardship is expected to be long-term. Each
of these options depends upon the homeowner’s financial situation and the bank’s
willingness to negotiate, but all three options should be considered by
homeowners serious about keeping their homes and who can truly meet the terms of
the agreement they work out.
The “Non-Retention” Options – Letting Go of Your Home
Three more options might
be available if a homeowner is willing to lose their home during the process of
eliminating their mortgage debts. First, a pre-foreclosure sale of the home is
the most preferable for a homeowner interested in maintaining a good credit
score. Homeowners can sell their home and use the proceeds to pay off the bank.
Second, homeowners who are “upside down” on their mortgage (the outstanding
principal is more than the value of the home) have been on the rise with the
drop in real estate value, and consequently many more banks are seeing requests
for a “short sale”. Like the pre-foreclosure sale, a short sale allows the sale
of a home to satisfy your debt to the bank, but the bank absorbs a loss as a
result. Finally, the bank may accept a “deed-in-lieu” of foreclosure, simply
accepting the title to the home in exchange for forgiving the remaining owed on
the mortgage and the deficiency. Both the deed-in-lieu and the short sale
require your lender’s approval and the best case for each homeowner depends on
their situation.
Many Options are Available!
During this extraordinary
time, even the government has devised plans intended to help. The Home
Affordable Refinance Program gives between 4 and 5 million homeowners (with
Fannie Mae or Freddie Mac loans) an opportunity to refinance into more
affordable monthly payments. The Home Affordable Modification Program commits
$75 billion to helping homeowners restructure their loans to affordable rates.
In order
to fully consider all available options, consumers should consult an attorney,
who can assist by reviewing your lending documents, explaining all of the
options (both in and out of court) to relieve the debt and work with you to
develop a plan to keep you out of the red.
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