If you are one of the millions of Americans who is looking at the prospect of not being able to pay next month’s payment on your home you are probably looking for a crash course on your options. Well, I will try my best to give you the Cliff’s Notes version and hopefully give you some light at the end of the tunnel.
One of the first things you need to decide is whether this is going to be a long term or short term problem. If it is merely a matter of needing a month or two worth of payments to get by until you get back to work or through a health problem, then maybe you can take inventory of possible resources around you. It is going to be tough to refinance in today’s climate, especially without a job. However, here are some other options:
OPTION A:
Finding additional sources of money:
- Consider asking a family member for support. This doesn’t have to be a handout if you are uncomfortable doing that. You could work out an arrangement where they loaned you 4 months payments, say $4,000 (@ $1,000/mo). You could, in exchange, give them a 2nd mortgage on your home and make them payments with interest for a short time until repaid. You can actually use a brother or sister’s (but not a parent’s) IRA to make you the loan and they could earn the interest tax free! It is probably a better rate than what they are getting in CD’s or the stock market. (see: http://www.trustetc.com/new/allowable-investments/ira-permitted-investments.html )
- Maybe you own a car free and clear. You might be able to get a loan on that car that would tie you over until you are back on your feet. Be very, very careful with using debt to repay debt. You should be quite sure that it is only going to be a short term problem that you are experiencing. You don’t want to lose your car AND your house, especially given that you will need it to get back and forth to work.
- Take a loan against a 401k or IRA. Often times these retirement accounts will let you take a LOAN against them in times of hardship. Don’t just go an withdraw the money, you will have to pay the taxes on it and lose all the benefits of tax deferral. Speak to your accountant or do some research to make sure that you do this right.
- You may have a whole life insurance policy that has cash value. You could borrow against it, or you may decide to cash it in and exchange it for a more affordable, term life option.
- Avoid taking cash advances on credit cards or pay day loans. Those suckers will eat you alive in interest rates and fees. Only use these as a last resort.
- Make a list of all your possible sources for cash, rank them by the costs that are associated with the borrowing (interest rates, points, monthly payments, etc.) and then pick one.
Say you have determined that this is going to be a prolonged problem, or that you don’t have any additional financial resources to draw from. Then, you are going to have to make a determination whether or not the house is affordable at any price. This often involves a assessment of one’s total monthly expenditures and income. It is really going to take sitting down and taking a long hard look at what you are working with. For some of us, this may be the first time ever doing this. What you are doing, in essence, is a Financial Statement or a monthly budget. You need to get all your bills together and write them down. Many of us have put off ever doing this because, we are scared of what we have known for a long time: That there is too much month at the end of the money!! Let us say you did it though, and it looked like this:
- Groceries : $600
- Child Care: $550
- Mortgage: $1000
- Gas: $350
- Utilities/Cable/Telephone, etc: $850
- Other: $1,000
- Credit Cards: $700
Total: $5,100
And let’s say the following represented your income:
Income: John: $2,500 (Net take home) Mary: $2,500 (Net)
Now in this situation, John and Mary have been operating on a monthly budget that had them coming up short $100/mo BEFORE the hardship. If the hardship is only going to be temporary, and the income will return shortly, they may want to consider Option A of finding a short term money solution. You should be looking at ways to cut expenses in the interim. Maybe you can consolidate some debt using OPTION A as the means to do this. Perhaps you could pay off $7000 of credit card debt that requires payments of $700/mo and get $3,000 for 3 months of reserves of mortgage payments from a relative in exchange for a 2nd mortgage. This would cut your monthly expenses. Next look at non essentials, like cable or eating out, etc as ways to tighten the belts. The thing that you may find is that after you are out of the woods, you may not even miss them.
OPTION B:
Loan Modification: A loan modification is any alteration to the terms of your original note and mortgage that was originally signed with your lender. This can include a principal reduction, lowered interest rate or tacking on missed payments to the back end of your loan. You will have to excuse me if I am less than enthusiastic about this option. It sounds like a great solution, but here are the reasons that they don’t usually work:
- Servicers (those collecting your monthly payment that you may think is the lender) don’t have any skin in the game and get paid to drag things out. It is counter intuititve for them for many reasons.
- Investors in these pool of mortgage backed securities (of which your loan is one of many), often times have insurance called credit default swaps to cover default, but not modifications. Sometimes they have multiple insurance policies and get paid up to 30 times the face value of your mortgage if you default. Which option do you think they are going to push?
- The terms of the security agreement that was sold with you mortgage in it doesn’t allow for modifications and would open servicers up to liability if they did do so. This creates further disincentives for them to work with you.
- Only the Modifications that come with Principal reductions appear to be having any effect. Less than 9% of Modifications under Obama’s plan had reduced monthly payments.
- You still must qualify via Debt to Income Ratios
If you can beat the odds and get one done, I hope that I am wrong. You should be checking out HAMP’s site at: http://makinghomeaffordable.gov/
OPTION C:
Bankruptcy: There are many (most lawyers), who would throw this out as Option 1. Bankruptcy is not something to be entered into lightly, it does have long term implications to you and your family. It should be looked at as the nuclear option once all other resources have been exhausted. There are those who have so much debt either because of medical bills, credit cards etc, that they may not be able to dig themselves out. If that is the case, you should do some research into the different types of foreclosures (Chapter 7 and 13 being the most common) and find a knowledgeable Bankruptcy attorney. Start with this site: http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/glossary.html
Will the Bankruptcy take care of my foreclosure problem? The answer is….temporarily. There is a really good blog written by an expert attorney that will help you with BK options surrounding a foreclosure. Also local Attorney Jeff Mathias has a very informative blog as well. What happens is that it will STALL the foreclosure. The banks can’t move forward while the BK is open. Now they can get a motion for lifting of the stay of foreclosure if you don’t file correctly, otherwise they have to wait until this it is all done. Once the BK is done or a stay is granted, they will begin the process of foreclosure again, and you will need to do something to stop it and avoid the foreclosure.
OPTION D:
FIGHT! GRRRR… now I am particularly fond of this option given that I know some of the background of what these Banksters have and are doing to this country and its citizens. If you are going to fight the foreclosure there are two common ways of doing so in court:
- Pro Se: This means that you will be representing and defending yourself in the foreclosure lawsuit that the ‘bank’ is going to bring. Now there is an old expression attributed to Abe Lincoln said, “A man who represents himself has a fool for a client.” This does not mean that you can’t win. In the modern court system you are going to have a tough go of things. Being able to get your evidence introduced , and finding a sympathetic and educated judge may prove difficult. If you want to research the viability of this option, consider reading some accounts of others who have gone before you at sites like: http://www.foreclosurehamlet.org/
- Finding competent counsel: The bank is going to file a foreclosure action after about 3 months of missed payments in Iowa. They will issue you a notice of default and a notice of summary judgment. If you do nothing….They win! They get a judgment and will start foreclosure and eventually take your house. You can file an answer to their foreclosure. This could be a request for a delay of up to 6 months, it could be an opportunity to request discovery (which is where you could present the material facts of your case) , but doing nothing is the last thing you should do. Make sure if you are going to hire an attorney to defend you that they know what they are doing. Don’t hire them because they are your brother-in-law and they went to night school. You should research the cases of those that are winning, understand the law, learn about your mortgage company etc, and then interview multiple people.
- QWRL/Loan Audits: I would guess that over 90% of all loans have RESPA (Real Estate Settlement Procedures Act) and TILA (Truth in Lending Act) violations. These can be discovered by the use of a QWRL (Qualified Written Response Letter) to get copies of all pertinent documents associated with your loan. You could then take these documents and get a Forensic Loan Audit. Armed with this information, you may be able to win in court and get your foreclosure dismissed, or be in a better position to negotiate a loan modification or short sale.
OPTION E:
Selling: IF you have determined that you don’t want to stay in the home any more or that you don’t want to fight the foreclosure you may decide that selling your home is the best option. If this is the case, then you will have to determine whether you have any equity in your home. Equity is the difference between what you owe and what they house will sell for, like a spread or your money.
Example: If you owed $100,000 on your mortgage, and your house could sell for $150,000. The difference between the two (or $50,000) is your equity.
Now, if you can get someone to buy your home for $150,000, then out of your equity you would have to pay customary costs, like Realtor commissions, closings costs, tax prorations etc. On the other hand, if you had the following scenario you have no equity:
Example 2: You own $100,000 on your mortgage, and your house is worth $90,000. The shortfall is going to have to be paid by someone.
If you have the money, you could list the property for sale, sell it and pay the difference. While it would hurt to have to do so, you could move on with your life. If you are like most of America, that is probably not feasible. If this is you, then you probably need to do:
Short Sale: A Short Sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan.
In order to do a short sale you will need to have someone willing to buy your property, and you will need to have approval from your bank to sell it at their offering price. In order to find such a buyer you can either:
- List the property with a Realtor to help find a buyer
- Try to sell your house FSBO (For Sale By Owner) using yardsigns, Craigslist, etc
- Contact Local buyers and Real Estate Investors ( giant flashing sign pointing at us! )
If you do decide to go this route we would love to talk to you about making an offer on your home feel free to send us an email to sandgrealestate@yahoo.com or call 800-BUY-KWIK- 24 Hour/day Representatives on call.
So, there they are! I hope you feel a little less in the dark about where you stand in this whole process. The clock is ticking though, so whatever route you take, get educated and then be decisive. Best of luck and feel free to send me an email if you have any questions or you can respond in the comments section below.
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