For many homeowners behind on their mortgage, today’s real estate climate is frightening. Banks are getting more and more aggressive by foreclosing on distressed properties at faster and faster speeds.
The result is that far too many homeowners on Long Island and in the five boroughs of New York are suffering the devastating negative effects of foreclosure.
It is more important than ever for homeowners to be armed with current and relevant information about meaningful options to avoid foreclosure.
While it is understandable that some homeowners who are struggling to make their mortgage payments dig in and fight to save their home, this is not always the best course of action. Sometimes a loan modification will allow you to remain in place by lowering your monthly payment, but often the bank will give you a bad deal where you will effectively repurchase your home for a lot more than it is really worth. Selling the house and moving to another, more affordable home in a rent-to-own agreement can be a better alternative. Even if you are “underwater” on your home, selling in a short sale is a possibility.
Why Avoid Foreclosure
People who go through a foreclosure due to missed mortgage payments suffer negative effects for years to come. Most people in foreclosure endure an immediate drop in their credit score. The foreclosure will affect future borrowing rates, and mortgage lenders will generally offer only small loans with sky high interest rates. Also, after a foreclosure your lender may decide to pursue a deficiency judgment, legal action to recover the unpaid amount on the foreclosed mortgage. The lender then may garnish wages and pursue bank accounts for the outstanding money owed. As if the devastating financial and credit consequences weren’t enough, a homeowner who undergoes foreclosure has to deal with the emotional trauma of being evicted from his or her own home without control. It’s no wonder that many people facing foreclosure seek alternatives like a loan modification or a short sale with a rent-to-buy arrangement to get a fresh start in a new home.
Loan Modification a Good Idea?
At first glance, a loan modification may sound like a good idea. With a loan modification you avoid foreclosure, remain in your home and resolve your delinquency status with the bank if you are behind on the loan. You may get reduced monthly payments, and if you have an Adjustable Rate Mortgage (ARM) with ever increasing interest rates, you may be able to get the bank to issue a Fixed Rate Mortgage instead.
However, with a loan modification you would still owe the entire debt to the lender, which may be more than the original debt due to missed payments, interest, fees and required escrow that are rolled into the total amount owed. In fact, you may be offered an arrangement where you would be paying for a term of 40 years and end up owing significantly more than the house is actually worth. There is no guarantee that the housing market will go up to the point where you regain equity in the home, even in five to ten years’ time. The new payments may not be much lower than your current payments, if they are lower at all.
You have to ask yourself this important question: If you were buying a home today, would you buy your house for the same price as your loan modification?
The pros and cons of a loan modification
Sell and Move to a Rent-to-Own
In a perfect world, you would simply sell your house in a traditional sale, pay off the existing mortgage and buy another, more affordable home. But if you are underwater on your house, have less than stellar credit and no down payment, this course of action may not be available. A simple refinance may also be out of reach. However, selling your house in a short sale and moving to another house with a rent-to-own agreement with an option to buy can be a better solution. In a short sale the bank absorbs the loss and the rent-to-own agreement allows you to move immediately and break free of the stress of paying for an unaffordable mortgage. Your rent-to-own contract will give you time to improve your credit score and build equity in the home. You may also qualify for relocation money in the short sale that you can use as a down payment.
Lease-Option vs Lease Purchase
As a buyer in a rent-to-own agreement you would have the right, but not the obligation, to purchase the house sometime in the future. If you do not purchase the house when the lease ends, this option expires. However, different type of rent-to-own agreement called a lease-purchase agreement obligates you to buy the house at the end of the lease. As you can see, it is important to know the difference before you sign on the dotted line. In a rent-to-own agreement you can set the purchase price of the house when you sign the contract, or you can determine the purchase price when the lease expires based on the real estate market at that time.
In a rent-to-own agreement you may have to pay the seller a fee called option money, also known as option consideration. While there is no set amount charged for option money, it is typically between 2.5 and 7 percent of the purchase price of the house. It is sometimes possible to structure the contract so that the option money you pay is applied to the purchase of the house at closing.
Making the Right Decision
Realty Warehouse can help you weigh your options if you are facing foreclosure and you live on Long Island or in the five boroughs of New York City. We specialize in helping homeowners find alternatives to foreclosure and achieve the best outcome. Realty Warehouse enjoys an A+ accreditation rating from the respected Better Business Bureau. You can count on us to offer the advice you need and provide effective alternatives in this extremely stressful situation.
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This blog is for informational purposes only, subject to change.