DETROIT, MI – Homeowners everywhere are struggling to save their piece of the American Dream, their castle, their home.
Every week of news seems to promise a ray of hope, that’s quickly followed by more bad news for the economy, which means more bad news for them. More layoffs, pay cuts, benefit cuts, business bankruptcies, bailouts, rising expenses, the list goes on and on.
When they go looking for options to help them keep their homes, they run into a confusing array of claims, programs, advice, rumors and gossip.
There’s no shortage of bold headlines regarding the subject, but the media really offers very little in the way of a step-by-step analysis that makes sense of what’s real, what’s fraud and what’s realistic.
Caution is the key for homeowners when considering their options.
Take loan modification services, for example. A Google search for “Loan Modification” returns 320,000 matches for just the last month. How can anyone possibly make sense of that much information?
Making matters worse, a similar Google search for “Loan Modification Fraud” returns 33,000 matches. The problem has gotten so big that the FBI formed a special unit to investigate foreclosure rescue scams in December of 2008, supervised by Travis Yarbrough. He was quoted in a Bloomberg article on the topic when asked who is running the scams, “A number of them previously worked in subprime mortgage companies. Some of these perpetrators have gotten very creative at separating homeowners from their money.”
So what’s a homeowner supposed to do?
Be very careful of who you take advice from. Don’t blindly trust the media, family, friends, neighbors or even “experts” as they often don’t have 100% of the facts. Nor do they have to live with the repercussions of their advice – only you will.
So, do your own research and question everything. Understand that there’s no “magic” that will solve all your problems, despite how desperate you may be for a solution. Yes, there are always several actual outrageous success stories, but the chances of it happening for you are similar to your chances of winning the lottery. Most actual solutions involve a LOT OF WORK.
Lastly, remember that hope is not a plan, nor a strategy. You MUST take action or someone will do so for you and their solution will be what’s best for them, not you.
Now let’s try to bring some clarity to the chaos.
STEP #1: Build a Budget!
If you’re struggling with your finances, the only logical way to fix the problem is to complete a very comprehensive monthly budget. Issues to keep in mind:
- For your income remember there are 52 weeks in a year, not 4 weeks in a month.
- Don’t forget items you may pay only quarterly, semi-annually or once a year.
- Be careful about being unrealistically aggressive when budgeting.
STEP #2: Can You AFFORD to Stay in your Home?
This is one of the hardest questions to honestly answer as it involves a lot of emotion. You may want to seek the assistance of someone you trust outside of your household to review your budget and be blunt with you on its viability.
If you wait too long to take proactive action, you’re options will be fewer, if any.
USING SAVINGS TO LIVE OFF OR SUPPLEMENT INCOME – if you plan to ride out the storm by living off savings or a buyout, then you need to know how long you can do so. The challenge here is being realistic and knowing when to throw the towel in and look at the other options.
STEP #3: You Want to Stay, but Can’t Afford the Current Payment
If you’ve reduced your spending on everything you can, but your expenses are still greater than your income, then you need to consider other options to reduce expenses.
REDUCING YOUR MORTGAGE PAYMENT – Obama’s “Making Home Affordable Program”
The Obama administration initiated a plan on March 4, 2009 to help an estimated 7 to 9 million homeowners keep their homes by lowering their mortgage payments through one of two ways:
Home Affordable Refinance
Even if you owe slightly more than your home is worth, you may be able to refinance to a lower rate if:
- Your mortgage payments are current (no more than 30 days late in the last 12 months)
- The property is your primary residence
- Your loan is owned or guaranteed by FNMA or FHLMC
- You owe no more than 105% of your home’s value
- Your stable & continuing income will support the new monthly payment
- You apply before June 10, 2010
Challenges on this program:
- No cash out or debt consolidation is allowed
- 2nd mortgages may not be paid off.
- 2nd mortgages must subordinate for this program, but they don’t always agree to do so!
Home Affordable Modification
If you owe more than 105% of your home’s value or you’re behind on your mortgage payments, this option may help you if:
- Your primary residence is a 1-4 family property
- Your mortgage was originated prior to January 1, 2009
- Your mortgage payment + taxes + insurance exceeds 31% of your gross monthly income
- The Servicer of your mortgage voluntarily participates in the program
- A modification plan must be in place prior to December 31, 2012
Participating (voluntary) lenders are instructed by the plan to modify mortgages to 31% of a homeowner’s income, using the following steps in order:
- Lower the interest rate in 1/8% increments to a floor of 2%
- Extend term of a loan in 12 month increments to a maximum of 40 years from mod date
- Forebear a part of the loan, with no interest, which will have a balloon payment.
- Voluntarily only – agree to reduce the principal of the loan.
LOWERING UNSECURED DEBT PAYMENTS
Many credit companies will negotiate payments and interest rates to help consumers avoid defaulting on their accounts. Some things to keep in mind:
- The credit account will usually be closed so it can no longer be accessed.
- It may also result in late payments being reported to credit bureaus. This is done to make it difficult for a consumer to open up new credit accounts until the negotiated account has been paid. Often, an agreement in writing can be made that upon full payment, the reported late payments will be removed.
- Get all agreements in writing!
- HUD Certified Consumer Debt Counselors are available 888-995-HOPE, website http://www.hud.gov/offices/hsg/sfh/hcc/fc/)
STEP #4: No Options to Afford to Stay or Don’t Want to Stay
If you’ve explored all your options, but still can’t afford your home OR you wish to more on for other reasons, then you can explore a short sale, deed-in-lieu of foreclosure or wait for the inevitable foreclosure.
RENTING OUT YOUR HOME
It’s most likely that whatever rental income you can get won’t cover your payment. If it does great, just be careful to go over this with a rental professional as there are all sorts of hidden costs associated with being a landlord.
If the projected market rent doesn’t cover your payment, it may cover enough for you to be able to comfortably make up the difference. Again though, check with a professional so you’re aware of the hidden costs involved.
NOTE: Be VERY careful when considering this strategy! Once you rent out your home you lose many tax benefits and legal protections.
A short sale is where you get your mortgage lender to accept less than you owe them in order to sell your home. Keep in mind:
- The average short sale takes 2-3 months to complete AFTER a buyer is found
- Your lender may not stop their foreclosure actions even if you find a buyer
- 2nd lien lenders will make short sale negotiations much more difficult
- TAX ISSUES – most lenders will send a 1099-C and leave it to you to address tax issues. At the end of 2007, the Mortgage Debt Forgiveness Act was enacted. If you receive a 1099-C, it may not be taxable under this act. Read IRS Publication 4681 for details. NOTE: cash out from your home used for anything but home improvement will usually be taxable!
- DEFICIENCY JUDGMENTS: most 1st lenders will agree not to pursue. Many 2nd lenders will want to preserve their rights to pursue a judgment at some later time.
- NEW MORTGAGE: FNMA currently requires a 2 year waiting period after a short sale.
This is where a lender agrees to take your home back via a Quit Claim Deed, instead of pursuing foreclosure. Due to excessive foreclosure inventory, many lenders are not currently agreeing to this strategy.
- If you have a 2nd lien, this strategy is usually NOT an option unless both liens held by same lender.
- Tax & Deficiency issues from above apply
- NEW MORTGAGE: FHA allows the shortest waiting period of 3 years.
In Michigan, the foreclosure process can take up to 9 months or more to complete. During this time, you can live in your home without making payments.
- Michigan gives lenders two options for foreclosure: judicial and by advertisement (most common)
- A homeowner has no legal obligation to move out of their home immediately after Sheriff’s Sale
- Most residential homeowners in Michigan are allowed a 6 month Redemption Period
- You have no Tenant rights in Michigan after expiration of Redemption Period
- DEFICIENCY JUDGMENTS: If 1st lender bids amount they are owed, it’s unlikely they will pursue a deficiency judgment. If they bid less than they are owed (becoming more common) they can pursue a deficiency judgment for the difference between what they are owed and what they bid (must be at least fair market value). 2nd lenders can pursue deficiency judgments unless they agree to forego for a reduced settlement.
- NEW MORTGAGE: FHA currently requires a 3 year waiting period after a foreclosure, an exception is possible if extenuating circumstances.
The possibility of deficiency judgments may force many homeowners to also consider filing bankruptcy after a short sale, deed-in-lieu or foreclosure.
A homeowner may also consider bankruptcy if they feel strongly about staying in their home and choose to let all their unsecured debt go and focus all income on saving their home.
Many people reading this document may be desperate enough to believe almost anything that appears to offer some sort of assistance out of their dilemma. Do not make this mistake.
There are many websites advertising how they can help you ‘walk-away” from your home, many of them represent you can do so with no financial repercussions. As mentioned above, this is not the case.
Be proactive and seek out the assistance of experienced and reputable professionals. Question everything! If someone cannot or will not explain your options to your satisfaction – run, don’t just walk away from them. This is a sign they either don’t know themselves, don’t think you’re worth the time or don’t want you to know. None of which you should accept.
WARNING: This post is not intended to offer any legal advice so, it’s highly recommended that competent legal & professional advice be obtained.