Many homeowners are facing the prospect of losing their homes to foreclosure in today's real estate climate. This has come about for many reasons, chiefly declining property values and too-easy-to-obtain mortgage loans in the past few years, coupled with a general downturn in the economy - layoffs, outsourcing and downsizing of jobs overseas. . . the potential culprits are many!
Out of necessity has arrived a relatively new class of service to distraught homeowners, the foreclosure prevention service. We will examine these services and see what they can and cannot do to help a homeowner in trouble.
A foreclosure prevention service or counselor is an entity that acts a liaison between the borrower and the lender or mortgage servicing company that receives payments on the loan. The counselor may be employed by an attorney or private firm, or may be part of local, county, state or federal government help resources.
Although it is certainly the common objective of all parties involved to get the loan worked out or “fixed" before foreclosure occurs, it is a balancing act on the foreclosure service's part, between making the lender happy and helping the borrower keep their home. Every solution short of actual foreclosure is still going to cost the lender money and they have to weigh each situation individually against the cost of actually foreclosing. It has been estimated that the average cost to a lender of a foreclosure is a minimum of $50,000 and that includes lost interest, legal and government fees, and the cost of carrying the home on their books, shuttered and boarded, taxes and maintenance still must be paid, and then getting it sold and paying a real estate commission to do so.
Bottom line: if keeping the borrower in the home and not foreclosing is cheaper than actually foreclosing, the loan can usually be worked out to allow the borrower to “save" their home and make fresh payment arrangements.
The first thing that must be done is to have a realistic assessment of the borrower's financial situation: income, debts, assets, etc. What can they afford to pay versus their current payment? What is the property worth now versus when the mortgage was originally made? Many times the value is now less than what is still owed, the borrower is “upside down" in their mortgage. Such borrowers often merely “walk away" from the home and let the bank take it. All income and monthly expenses must be documented - even though such documentation may not have been required originally, in what is known as “states income/stated asset" (SISA) loans.
The homeowner will have to go on a strict budget, get rid of luxuries - fancy cars, second homes, expensive cable/satellite TV packages, etc. Finally a new and leaner budget is arrived at. . . what the borrower needs to pay to live every month, and a couple hundred dollars extra added in as a cushion for unforeseen expenses. Deducting this budget total from monthly net income leaves a figure for the lender to look at, as a basis for a new monthly mortgage payment. Sometimes there is no money left, the household income has dropped too much or the home is just way too expensive for the homeowner to realistically retain any longer.
But assuming there is money available to pay a mortgage: the lender now considers options. Their best scenario is not to change the interest rate or term of the loan at all, just to allow the homeowner to gradually make up the missed payments and become fully current again eventually.
The next set of options for a lender is to extend the loan's term and/or reduce the interest rate, at least temporarily, thus lowering the monthly payment.
The most extreme option for a lender, and the one they will least wish to do, is to write down the principle amount of the loan in recognition of lost property value. The new loan, for less principle, will have a lower monthly payment. The new contract will usually have a clause that states that when the home is eventually sold by the homeowner, even if years from now, if by then property values have recovered, the lender is entitled to recoup the written-down principle amount at that time.
In investigating your options when foreclosure looms, try to contact your lender directly or utilize government assistance programs. Be skeptical of attorneys or private firms offering to save you from foreclosure, and do NOT sign away your home's deed! Check with your state office of consumer protection or attorney general, local Better Business Bureau and other resources before entering into any contracts. In many states, it is now illegal for a private firm to ask for any money “up front" to assist you.
James Hussher is a Certified Mortgage Planner and licensed in all 50 states. Please visit James at http://ezmortgages123.com for all of your residential and commercial mortgage needs. Apply online, check current offered rates and loan programs and more! Many free articles and educational resources may be accessed at http://swifthussherrealestate.com which James also runs!