Maplewood, NJ –
As homeowners enjoy the low introductory interest rates afforded by their Adjustable Rate Mortgages (ARMs) many wait helplessly as their interest rates adjust significantly upward. Skyrocketing monthly payments, and tax increases drive home foreclosures on a steady increase. Here’s what to tell your friends who are facing the prospect of losing their home.
Options for people when facing foreclosure include:
1. Borrow money from family and friends to catch up on payments.
If someone you know falls behind on payments due to a temporary problem this is a solution that works. By temporary I mean perhaps they paid unexpected medical expenses, there was a short lapse in employment, or a slow season in their business. If, on the other hand, the arrears are more ‘systematic’ like they have completely lost their job, their adjustable rate mortgage just adjusted up (they never come down by the way), or they are just plain irresponsible, then this is not the solution you want to recommend. You can’t solve systematic problems with non-systematic solutions. So borrowing money one time would likely hold off the home loss for a short time, and the problem would be back larger than life again SOON.
2. Renegotiate a mortgage with the bank (forbearance agreement)
Banks don’t want to foreclose their loans. If you unaware, banks are in the business of lending money. They would much rather help a formerly paying customer regain their paying status than take back a property. That’s the good news. The bad news is that banks WILL foreclose on a customer if they can’t pay and more importantly don’t communicate. That’s where forbearance agreements come in. If a homeowner is 3 or more months behind on their mortgage payments the bank will likely not accept anything less that the full arrears amount (no partial payment). If the homeowner doesn’t come up with that amount they will find themselves on the slippery slope of foreclosure. A forbearance agreement is a written communication with the bank that will allow the homeowner to reinstate the payments over time, with less of an immediate lump sum payment.
3. Refinancing with a mortgage company.
If the homeowner has sufficient equity refinancing may be a viable option. The key here is that the financial problem must be a temporary. If they cannot make payments due to job loss, or simply have insufficient income I don’t recommend it.
If they are 62 or older, however, they can continue to live in the home and receive monthly cash advances if they qualify. The Home Equity Conversion Mortgage (HECM), or reverse mortgage, gives homeowners a simple way to unlock the equity in your home without selling.
Backed by the Federal Housing Administration (FHA), a HECM loan enables them to tap the equity in their home. Unlike traditional home loans, which require a monthly payment, a HECM actually pays the homeowner. Best of all, an HECM requires no repayment of monies received as long as they occupy their home as a primary residence. Upon leaving the home, for whatever reason, the loan balance plus accrued interest becomes due and payable. Contact us for a referral for a great service provider.
4. Sell your home immediately to save equity.
If a homeowner fails to execute any of the 3 previous options, there isn’t much chance that they will be able to redeem their home. The best option at this juncture would be to sell the home immediately to preserve any equity they may have left.
The most common mistake made by homeowners who reach this point is overpricing. There are two typical reasons for overpricing: Greed and Necessity. The problem is that regardless of which reason it is, the homeowner will ALWAYS claim it is Necessity, and they will almost surely LOSE as a result.
When homeowners in distress list homes to maximize their potential profit in many cases they have the wrong attitude. Though they believe they ‘MUST’ walk away with a certain amount of money from the sale. The correct attitude would be to sell at ANY price that will get it under contract TODAY. The correct question is “What is the highest price I can get for my house, and close in 45 days?”
If a homeowner owes what the house is worth or WORSE, owes MORE that the house is worth he or she will likely instruct their sales agent to list the house at a price to match. In cases like this the homeowner MUST seek the assistance of a Professional Homebuyer.
5. File for bankruptcy.
Bankruptcy is 2nd to last for a reason. Contrary to popular opinion, bankruptcy is a band-aid at best, and not a very good one. For more on the negative long term effects on bankruptcy, ask anyone who has been through it.
Option 999: Do nothing.
The worst thing (maybe 2nd worst – stay tuned for “the worst solution”) a person or family can do when faced with a foreclosure is do nothing. The problem won’t go away by itself, and doing nothing will inevitably make the situation worse.