As a Massachusetts Realtor who has assisted many home owners with short sales over the past few years, I would like to impart a little wisdom to homeowners that are facing foreclosure.
Options to Foreclosure
The first piece of advice is not to sit back, get overwhelmed and do nothing. You have options to foreclosure. You generally have 5 options to avoid foreclosure and almost in all circumstance you are better off exercising one of these options rather than letting the bank foreclose. For most underwater
homeowners, a loan modification or a short sale are the two most viable with a short sale usually being the only option. While you will “sell” your home during a short sale, a short sale provides you with a fresh start.
One problem I see with homeowners is they do not rationally think about their situation and they chase options that are just not viable for them. Meanwhile they spend so much time trying to make a decision or chase an option that will not work, while other either a foreclosure date sneaks up on them or they have spent a 6-months to a year chasing a loan modification that had no chance of being approved.
Chasing the Loan Modification
There is some rhyme and reason to a loan modification. First off you do need to qualify for a loan
modification it is not arbitrary.
This means you do need to be working and there are income guidelines to be met. If you are not working or have had a serious loss of income chances are slim to none of qualifying. If you have had a loss of income but are working the qualifying ratio is usually 41%. Meaning, the banks want to see 41% or less of your gross income must go towards your mortgage, taxes insurance as well as your consumer debt.
Consumer debt is credit cards, auto loans, student loans, installment payments and such. The farther away you get from the 41% ratio the less chance you have of qualifying.
There Are Criteria for Qualifying for a Loan Modification
It is also important to remember how the bank modifies the loan. I have never seen a bank reduce the principal of the loan. They modify the loan through rate reductions and re-amortizing a loan.
So what does that mean? If your rate is currently 6% they may opt to lower the rate a couple percentage points. They will lower it to current market rates or sometime a little bit below. A 2% drop in rate on a 250K mortgage may translate into a $300 a month savings.
Re-amortizing the loan to 40 years could save you another $140 per month for a total saving of about $440 a month. Realistically, would $440 a month allow you to make your mortgage payments? The answer to that is personal to each homeowner.
Your Mortgage Balance is Growing As You Wait for a Loan Modification
Now the other thing that happens quite frequently, is if you do get your loan modified the payment is higher than your current payment!!
Why? A loan modification can take time. Say you were already late several months, than you went into a loan modification. I’ve seen some loan modifications take up to a year to get approved…. 5-7 months is definitely not out of the question. If your original loan balance was $250,000 and you have ended up missing a 10 months of payments now instead of owing $250,000 you can now owe upwards of $270,000 dollars.
Do You Really Want to Pay For A Home That Isn’t worth What You Paid?
The next question to ask yourself is, do you really want to own a home that is worth 20-50% less than what you actually owe on it? Probably not.
If your home is worth $200,000 today and you owe $270,000 it could take you 8-10 years of average appreciation 3-4% just to break even again assuming the market has hot bottom and we see an appreciation of 3-4% a year in home appreciation.
My advice is try to remove the emotion and think rationally about your situation. Realistically where do you stand to day financially and best guess what do you think a bank will do for a loan modification if you even qualify?
You have a limited time before the bank forecloses, don’t waste time chasing a loan modification.
Other Resources for Short Sales, Foreclosures and Loan Modifications:
This post, Massachusetts Short Sales- Chasing the Loan Modification, was provided by Kevin Vitali of EXIT Group One Real Estate In Tewksbury MA. If you need to do a short sale in Massachusetts or would like to know all of your options to foreclosure, contact Kevin by email at email@example.com or call 978-360-0422.
Real Estate Services in the northeast Massachusetts, around the Merrimack Valley and including the towns of Andover, Billerica, Boxford, Chelmsford, Dracut, Georgetown, Groveland, Haverhill, Lawrence, Lowell, Merrimac, North Andover, Newbury, Newburyport, North Reading, Rowley, Tewksbury, Tyngsboro, Westford, Wilmington, West Newbury