Foreclosure Prevention

A short sale refers to an arrangement between the homeowner and the mortgage lender to accept less than the total amount due in order to pay off the property loan. The lender consents to accept the sales proceeds as full payment of your loan despite the fact that it will be “short.” In the case of a short sale, prior lender approval is necessary as they must agree to accept less than the total amount due. It is not possible to force them to consent to a short sale. This necessitates a negotiated agreement with the lender to consent to your short sale and avoid foreclosure on your property.

A loan modification changes the terms of your existing loan. Every loan has 3 components: 1.) a principal amount, 2.) an interest rate and 3.) a term. For example, you may have a $300,000 mortgage with a 6% interest rate with a 30-year term. If you’re behind on your mortgage for $20,000, a loan modification could take what you owe and roll it into the principal balance, so instead of owing $300,000, you would owe $320,000. Your interest rate would be adjusted, typically to today’s interest rate and the term would remain the same. This could result in a much higher monthly payment, particularly if you currently have a very good interest rate.

A mortgage refinance, unlike a loan modification, does not change the terms of your existing loan. Instead, you obtain a new loan with different terms. A refinance has many additional requirements. These include:

• a good credit score – ideally a score of 700 or more;
• a good debt-to-income ratio – this is the percentage of your monthly gross income that is devoted to your debt, which should ideally be 36% or less. This means that if, for example, your credit card payments and car  payments total $1,500 per month and your gross monthly income is $4,000, your debt-to-income ratio is 37.5%;
• a loan-to-value ratio – this is how much you owe on the mortgage divided by the value of your home. For example, if your home is worth $300,000 and you owe $250,000, you would divide $250,000 by $300,000 to get a loan-to-value of 83.33%. You will need at least 5% equity for a refinance, but will get the best terms with 20% or more equity.

A mortgage reinstatement is when you pay back the amount that you’re behind on your mortgage in full. For example, if you’re behind $20,000, you would pay your lender $20,000 to reinstate your mortgage. Most people who are struggling with debt are unlikely to have $20,000. Withdrawing money from your retirement account to pay for a reinstatement is generally not a sound financial decision because the withdrawal will be taxed as income and you will pay an early withdrawal fee.

You also need to understand your bankruptcy options. A primary reason for undertaking a short sale is to avoid bankruptcy. Sometimes bankruptcy might be a more conducive option. However, this firm DOES NOT practice bankruptcy law.