When borrower’s mortgages go under water, they are often embarrassed to admit they have money problems and cannot afford their monthly payments. Some borrowers refuse to contact their lenders and admit their problems even though most lenders are willing to negotiate with the borrower to help them meet their payment obligations. During a recession, the cost of real estate goes down so borrowers that have 2 mortgages or even one mortgage find it hard to meet their monthly payment obligations. Some borrowers are forced to sell their home, but even then they will probably experience a loss, especially if they need to sell their home quickly.
Lenders will send letters and contact borrowers to inform them that they are behind on their mortgage payment. If a borrower fails to respond to the letters and phone calls, they are risking a chance at losing their home because they are demonstrating to the lender that they do not care about their problems. Lenders will work with borrowers if they contact them immediately when they start to recognize they have a financial problem. A borrower should never assume they can take care of their financial problems on their own because most of the time, it won’t work out for the best.
Several borrowers believe that lenders won’t or cannot help their borrowers when their mortgage is under water. Those borrowers are wrong because lenders want to help borrowers make their payments because when a house goes into foreclosure, they lose money too. If you have been a good paying customer in the past and you have a good reason why you fell behind on your mortgage (job loss, divorce, etc.) then lenders will be willing to help. The best way to convince a lender to re-structure your mortgage is to provide them with a date when you can get back on your feet. For example, you may have been laid-off by a corporation doing cut-backs, if you start interviewing for new jobs and have solid prospects, lenders will help you with your mortgage until you land the new job.
The costs of foreclosure are expensive and lenders want to avoid foreclosing on borrowers homes. The lenders want borrowers for their money; they could care less about the house. Borrowers that contact their lenders about their financial problems are 90% more likely to keep their home and cure their financial woes within 18 months. Lenders actually have several options available for customers that are under water on their mortgages. Here are a few of their options:
A partial reinstatement allows borrowers the option to make partial payments to make up for the amount that is owed. For example, if a borrower is 4 months behind on their mortgage, and they can begin making full payments again, the lender will set up a balloon payment. The balloon payment will borrow the needed money from the HUD to pay the missed payments and you then will repay this money plus interest.
The keyword for any borrower that is behind on their monthly mortgage payments is “forbearance”. Forbearance allows borrowers to take a break from their monthly mortgage payments for a month or two while they recover from an injury or find a new job. The lender has the ability to give you a short-term forbearance which is one or two months or a long-term forbearance which is suspending payments for 4-12 months. The repayment plan will include payment as a lump sum or monthly installments until you have paid back the amount you received a break from.
Another option lenders have available is loan modification. Loan modification allows lenders to cut the interest rate or increase the payment period so the mortgage can become affordable to the borrower. Lenders can also add late payments to your total balance to allow you to take a break from mortgage payments for a couple months. Borrowers typically revert to converting the loan to a longer term or adjusting the rate since it can reduce the payment by hundreds of dollars a month. Loan modification is a permanent change to a mortgage so when the borrower has their finances back on track, they need to look at the overall advantages of their new loan for the future.
Under water mortgage is defined as owing more on your mortgage balance than the value of your home. When you have significantly higher levels of debt compared to equity, you are considered to be highly leveraged and under water on your mortgage. Financial institutions used residential and commercial mortgages to secure equity. The only reason financial institutions took on debt from borrower’s way because they assumed they will make money instead of lose it to a recession. Borrowers are also in the same situation as financial institutions because they took out loans that were much higher than their annual income could afford.
People also began borrowing equity against their home to invest in the stock market or in other areas. When the stocks began to fall, investors began losing money and were not able to pay back the amount of money they borrowed. When purchases lose value, the return falls and investors are stuck in positions where they have to pay back their investments without being able to sell the investment for enough money to pay back the loan. Home buyers have now learned the hard way that it is never a good idea to borrow money to invest in the stock market.
The best advice anyone can hear that has an underwater mortgage is to get on the phone with their lender right away. The collection agents at a lender are not the individuals you need to speak with, ask to speak with the workout department because they are the ones that can provide you with some type of help. If you are worried about negotiating with a lender, call a non-profit homeownership counseling agency. These agencies are staffed with individuals that negotiate lower interest rates and affordable monthly payments on the behalf of borrowers. Counseling agencies will also take a look at your finances and show you ways you can save money to put toward your monthly mortgage payment so you don’t end up losing your home to foreclosure.
For those individuals that are too far under water with their mortgage, the lender may have to help you agree to another option. The first option you are always given is to try selling your home. If a borrower is unable to sell their home, they are always given the option to hand over the keys to the lender by transferring the title back to the lender.
A short sale allows the lender to accommodate property to help the borrower avoid loss. A loss mitigation specialist will come to the house and estimate it to determine if it is worth the amount of money that is owed. A short sale is then when another party offers to lend money to the borrower to pay back the bank for a short loss. The borrower may be able to keep the property and the bank won’t be looking at a loss. Most lenders will not even consider a short sale and the borrowers are looking at a hit on their credit report. However, it can be used as a last resort to get out of an underwater mortgage.
Typically foreclosure is the best option for an individual that is under water on their mortgage and cannot sell the home to make up the difference. Banks normally cannot sell the foreclosed home at auction for enough to cover the cost of the original mortgage loan and all the legal fees, but they are willing to do it because they can collect on at least some of the money owed by borrowers.
Borrowing What You Can Afford
Unfortunately for many borrowers, they become underwater on their mortgage the second they sign the paperwork and cannot put a down payment on the home. It is the same philosophy as purchasing a new car, everyone knows the second the car is driven off the lot, and it immediately depreciates. If you weren’t smart in the beginning, you are going to learn the lesson about investing the hard way. Even if you were smart and you did put a down payment on the house, you may have been in over your head in purchasing a home that was out of your price range.
The best thing a person with an underwater mortgage can do is sell the house and take their losses. Assume this into your debt and purchase a smaller home with lower monthly payments and pay back the rest of the money you owe on the other house. Once you are back on your feet, save money again if you decide to purchase a slightly larger home. It is always a wise decision to save money since a recession can hit at any time and when it does, you don’t want to be one of those individuals that is under water with their mortgage.