As a homeowner, you take pride in your home and you probably have a family that needs a roof over its head. Unfortunately, you may find yourself in financial distress to the point where meeting your monthly mortgage payment becomes increasingly difficult. Maybe you feel threatened by the looming possibility of a bank foreclosure. For homeowners on Long Island and in the five boroughs who are in this situation, there is a way out. The important thing is to weigh your options and decide whether to stay in your home and seek a loan modification from the bank, or sell the house and get a fresh start in a more affordable home.
A loan modification is a change to your loan agreement with the bank or other lender. You may be able to get a loan modification even if you have not defaulted on your loan, which can save a negative impact to your credit score. In a loan modification, you will wind up paying less each month, making your monthly mortgage payment more affordable. The lender may extend the term of your loan, lower your interest rate or, rarely, lower the loan principal amount.
You may wonder why the bank would be willing to modify the terms of your agreement. First of all, your bank may find it easier and less expensive to work with you than to sue you in a costly and time consuming foreclosure proceeding. After foreclosure, the bank will end up with your property to auction off, and the proceeds may not cover the amount that is owed on the mortgage. The bank also sees a risk that you will declare bankruptcy and they may end up with nothing.
Pros of a Loan Modification
People with an Adjustable Rate Mortgage (ARM) can find themselves in trouble when interest rates goes up resulting in higher monthly mortgage payments. One type of loan modification involves negotiating with the bank to change your ARM to a fixed rate mortgage. A fixed rate mortgage makes it easier for you to budget, and you may get a lower interest rate. Modifying your loan will halt foreclosure proceedings and any late charges will likely be applied to the end of the loan.
Cons of a Loan Modification
After convincing the bank to give you a loan modification, you may find that you are unable to afford the modified payment. In that case, you may still face foreclosure. Some loan modifications extend the term of the loan to 40 years and you will still owe the entire debt to the lender. If you are “underwater” and owe more on your loan than the house is worth, you may have to wait years until the house increases in value. Depending on how the bank reports the modification, you can suffer a negative hit on your credit. You may also owe tax on the modified amount.
If you have missed some mortgage payments, you are accumulating interest on the loan. Unfortunately, even with a loan modification, five years from now you can still be underwater with the bank. Consider this. If you were buying a new home today, would you buy for the same amount you will still owe in a loan modification? Your mortgage may have become so costly that it is not worth it to stay. When your home becomes an expensive financial liability with expensive maintenance expenses, you have to ask yourself if a loan modification is the right decision. Selling your house, perhaps in a short sale, may be a better option.
For a more in-depth read on the pros and cons of a loan modification.
Another alternative to foreclosure is selling your home and relocating to make a fresh start. A rent-to-own agreement involves two separate but linked contracts, one document for the rental and one document for the purchase of the home.
The Rental Agreement
In a rent-to-own agreement, the buyer rents the house for a specific time period with the right to purchase the home after the lease term is up. The rental contract, like any other, will state the monthly rental amount and the responsibilities and rights of both the landlord and tenant. The homeowner retains the right to evict the renter for nonpayment. A typical rental term in a rent-to-own agreement is 12 -36 months. As a buyer, a longer rental period can be beneficial.
The Purchase Agreement
The purchase part of a rent-to-own contract may specify the purchase price, or state when and how the purchase price will be determined. As a buyer, you have to make sure that the seller is the owner of the property in a title search and determine that there are no judgments or liens that could prevent the transfer of ownership. The seller may ask for an option fee in exchange for giving the buyer the exclusive right to purchase the home. If you are asked for an option fee, you have to be sure to find out the circumstances under which the fee could be forfeited.
Pros of Rent-to-Own
For a rent-to-own agreement, it’s pretty much all good for the buyer. You sell your current home and in return get the entire mortgage balance forgiven. You will have removed yourself from an unaffordable home and placed yourself in a more affordable situation by renting a new home with an option to buy. You may be able to structure your rental agreement so that a portion of your monthly rent goes into an escrow account until the day you purchase the property. That way, you accumulate money for a down payment when the time comes to buy. Within two years, it is possible to have built-in equity of $50,000 or even more.
Cons of a Rent-to-Own
There are some drawbacks to a rent-to-own contract that you should be aware of. It may be difficult to find an owner who is willing to agree to the arrangement, and you may be liable for the maintenance on the property. If you decide not to go through with the deal, you may lose your option fee and extra rent that you have been setting aside for your down payment.
Making the Right Decision
Every situation is different, and you have to weigh the pros and cons to come up with a viable alternative to foreclosure.
Realty Warehouse can help if you live on Long Island or in the five boroughs of New York.
We specialize in helping homeowners like you choose the right option, whether it is a loan modification, a short sale or a rent-to-own agreement. Our relocation department can help you find more affordable housing, and we may be able to help you get money for the relocation process. 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.