As a homeowner on Long Island or in the five boroughs of New York, you may feel that you have few options if you are threatened with foreclosure. Refinancing is usually not an choice, but in some cases the bank may agree to a loan modification. With a loan modification you may feel that the bank has offered you a lifeline because of lower, more affordable monthly mortgage payments.
However, you may discover that the loan modification the bank is offering is actually a bad deal that leaves you with significantly more debt than you started with. If that turns out to be the case, you should know that there are some better alternatives to foreclosure when a loan modification is not the right solution. It is important to be informed so you can make the best possible decision for yourself and your family.
Here is a look at some of the possibilities if you are struggling to make your mortgage payments and you are facing foreclosure.
Refinancing vs a Loan Modification
Don’t confuse refinancing with a loan modification. Refinancing your mortgage and agreeing to a loan modification are two very different options.
In a refinance agreement, your bank or another lender replaces the original mortgage with a completely new loan. A refinance may allow you to take advantage of current low interest rates and/or reduce your monthly mortgage payment. The problem for homeowners who are in distress is that the bank will look at your credit score and ask if you have been late with mortgage payments. They will look at your Debt-to-Income ratio to see if you have too much debt to meet the mortgage obligation.
The bank will determine what percentage of your monthly income you will have to spend on your monthly mortgage payments. They will also consider how much equity you have in the home. The rule of thumb is that your payments should be around 31 percent of your income, and the lender will want to see a minimum of 20 percent equity.
With a loan modification, you are obligated to deal with your current lender and the bank replaces the original mortgage with a new agreement. If you apply, make sure you are getting a permanent modification and not an adjustable loan with a short period of low interest, subsequent higher interest rates and possibly a huge balloon payment at the end. In most loan modifications your debt is not reduced. The bank may lower your monthly payments, but extend the loan for up to 40 years.
If you do the math, you may discover that you will wind up with more debt than you started with in a loan modification when the lender rolls late fees, missed payments and other charges into the total amount owed. In many cases the amount you end up owing is much more than the house is actually worth. If you apply for a loan modification, don’t be lulled into a belief that your credit is saved by the move. Many banks report the modification to the credit bureaus as partial payments. The result is that your credit score will take a severe hit.
Beware of Scams
You might have heard that loan modifications attract scam artists who ask you for money upfront, and then disappear without giving you the loan modification. But you can also get a bad deal from a well-known bank or other lender. There are horror stories out there where the bank tells the borrower that they will have a lower interest rate for a period of time, usually five years. The monthly payment then increases drastically, sometimes as high as 50 percent more.
The bank may tell you verbally that you will be able to reapply for another loan modification after the five year period, but when the time comes they announce that their policy is just one loan modification per customer. They may have you sign a Notice of No Oral Agreements so they can deny that they ever told you to reapply.
Getting a Fresh Start
As much as you may feel an emotional attachment to your home, when you are in danger of foreclosure it is no time to make emotional decisions. You don’t want to make matters worse with a bad loan modification deal from the bank. Oftentimes, selling your house and starting fresh is a much better idea than “buying back” your home for a lot more than it is really worth in a loan modification.
The Short Sale
An experienced short sale specialist may be able to help you convince the bank to agree to a short sale. Most banks require a licensed real estate broker/agent to list the property. A short sale is a sale in which the homeowner owes more than their house is worth and typically has fallen behind on their payments due to a hardship. They may sell their property with the bank agreeing to accept a lesser amount than what is owed as payment in full. In a short sale you stay in control of the timeline to keep the kids in school, and you buy some time to save up for relocation. You also avoid contentious foreclosure proceedings and you get to move and have a fresh start in life without the stress of an unaffordable mortgage payment.
In some cases, you might qualify to get money for relocation after a short sale. Moving with a rent-to-own agreement or lease-option agreement may be a good alternative after a short sale. In a lease-option agreement you pay rent and have the right to purchase the house in the future. In a lease-purchase agreement, you pay rent and you are obligated to purchase the house after a defined period of time.
Declining a Bad Loan Modification
Realty Warehouse can help if you are facing foreclosure and you live on Long Island or in the five boroughs of New York City. We can assist you in determining if the bank has offered you a bad deal in a loan modification. Our representatives help homeowners weigh-out options, in order to find alternatives to foreclosure such as a short sale and achieve the best possible outcome. Realty Warehouse enjoys an A+ accreditation rating from the respected Better Business Bureau. You can count on us to listen to your situation, offer the advice you need and provide effective alternatives in a stressful situation.
Call, click or chat with Realty Warehouse for a 10 minute consultation that can change your life.
This blog is for informational purposes only, subject to change.