Since the hope of a judicially supervised mortgage modification in bankruptcy seems to have died in the Senate, let’s examine the available options to resolve a mortgage deficiency.
Once you get behind, mortgage arrears can snowball to a point where you can’t just “catch up.” When that happens, there are 5 things you can do:
1. List and sell the house. If you can’t make the payments, selling the home pays off the mortgage and may even give you some cash to buy a new home. This used to be the quick, easy solution, but not in today’s economy. Houses just aren’t selling and the norm is that you probably owe more than the home is worth.
2. You can do a short sale. This requires the mortgage company to accept less than what is due, so that you can sell your house to someone for its true market value. This will pay the first mortgage, but may not pay a 2nd Mortgage or Line of Credit. And you won’t get anything out of the sale: any money received will go to the realtor, costs of sale and the mortgage company.
3. You can get a mortgage modification. The mortgage company can reduce the interest rate on your mortgage (thereby lowering your monthly payment); can add arrears to the end of the loan, (so you are not behind anymore); or can even change the amount you owe altogether. Unfortunately, in spite of the fact that there are federal and state laws that encourage such programs, modifications are scarce. Lenders have all sorts of conditions placed on the process and there is no legal requirement that anyone be granted a modification.
4. You can pay the arrearage. Unfortunately, mortgage companies want you to do this all at once. If you can’t come up with that much in cash, you can seek bankruptcy protection (typically a Chapter 13 bankruptcy) and spread the amount you are behind over several years.
5. You can walk away and allow the property to be foreclosed. (This is often a much better solution than it sounds, since you get to stay in the house for months rent-free before moving and there will be nothing due to the mortgage company even if they don’t recoup all of the money owed.)
There are advantages and disadvantages to all of the above, and over the next several weeks, we will examine each of these “remedies,” in greater detail.
[...] couple of weeks ago, I wrote an article about five things that can be done if you get behind on your house payments. I promised to take each suggestion in turn, and elaborate on the general [...]