Homeowners on Long Island and in the five boroughs who are struggling to meet their monthly mortgage payments can be proactive and find alternatives to a devastating foreclosure. However, choosing a strategy can be difficult. There are several options available, such as a Loan Modification, a Short Sale and just walking away from the house in a deed in lieu of foreclosure. To many, a Loan Modification sounds like a lifeline. You get to stay in your home, and your monthly mortgage payments are lowered.
What could go wrong?
Basics of a Loan Modification
A Loan Modification is a change to an existing mortgage loan that the bank grants because the borrower is no longer able to meet the monthly payments. If the situation is temporary, the bank may sign off on a Forbearance Agreement that provides short term relief from temporary financial difficulties. A Loan Modification is a long term solution for homeowners who do not expect to be able to meet the payments as they stand.
Not all Loan Modifications are the same. Some reduce your monthly mortgage payments by reducing the interest rate, while others extend the term of the loan. In a Principal Forbearance the bank forgives interest on a portion of the principle. Some Loan Modifications include a substantial balloon payment at the end.
Cons of a Loan Modification
While paying less for your mortgage each month, preventing foreclosure and staying in your home sounds like a good idea, there are some serious disadvantages to Loan Modifications.
Negative Impact on Your Credit Score
If you have missed a mortgage payment, you will certainly have a negative impact on your credit score. Some Loan Modification programs require that you miss a payment to be eligible. How the lender reports the modification to the credit bureau can also have an effect.
Fees and Other Costs
You may decide to hire an attorney or a consulting firm to negotiate your Loan Modification with the bank. In addition, there may be processing costs to execute the loan. When you miss mortgage payments and you are responsible for late fees they may be added to the loan principal. If this is the case in your situation, take a hard look at how much you will owe the bank. Late fees and interest can add up to the point where your Loan Modification saddles you with a principal that is far more than the house is worth, even though your monthly payments are reduced. An extended term, say from 30 to 40 years, will also add to the total amount of interest you pay on the mortgage loan.
You May Still Lose Your Home
The lender may deny a Loan Modification and offer a Short Sale as a way to prevent foreclosure. Or, the bank may start foreclosure proceedings as soon as they are entitled to do so.
The Short Sale Alternative
After careful consideration, many homeowners facing financial difficulties decide on a traditional sale or a Short Sale of their current home instead of a Loan Modification. If the real estate market is good and you are not “underwater” whereby you owe more to the bank than you will get when you sell, you can simply find the right buyer and move on to a more affordable home. However, many homeowners and investors are still suffering the effects of the recent housing downturn, and they are underwater on their property. In that case, a Short Sale can be the best option.
Negotiating a Short Sale
If you decide to make a fresh start and sell your home in a Short Sale, you need approval from the bank because the lender agrees to take less than you owe.
The process for a Short Sale is similar to a regular sale of your property. You deal with an agent, preferably a Short Sale specialist, in a mutually beneficial contract between you and the buyer. Your agent can guide you through the process by negotiating with the Loan Mitigation department at the bank. A company that specializes in foreclosure transactions can help you compose a hardship letter to convince the lender to take your Short Sale offer. Your agent will explain the documentation you will need in the “Short Sale Package.”
You may be wondering why the bank would agree to take less than you owe on your mortgage. A Short Sale can benefit the bank because if you default on the loan and they are forced to foreclose, they end up with a long and costly legal process and your house to sell at the end. If real estate prices are falling in your area, it can be in the bank’s best interest to do the Short Sale deal. A house acquired by the bank through a Short Sale is generally in better condition than a foreclosure. The bank usually stands to recoup more money with a Short Sale than a foreclosure.
Go With a Pro
Realty Warehouse can help if you live on Long Island or in the five boroughs of New York City and you are facing foreclosure. We specialize in helping homeowners like you 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 solutions in this extremely stressful situation.
Call, click or chat with Realty Warehouse for a free 10 minute consultation that can change your life.
This blog is for informational purposes only, subject to change.