An introductory guide to various options for homeowners facing mortgage loan problems.
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Introduction
Many homeowners are facing financial problems resulting in an inability to pay the full amount due on their home mortgage. This problem has been greatly compounded by the dramatic fall in home prices in the last two years, reducing or eliminating any real equity in a home’s value. Coupled with an extremely slow real estate market, this problem has lead to massive foreclosures, which flood the market with low priced homes, exacerbating the problem. However, option do exist for homeowners, including short sales, short loans, deed-in-lieu of foreclosure and forbearances which can help either save a home or allow for a better exit.
The first step to resolving any home loan problem is to contact your lender’s loss mitigation department and discuss what options they offer. New programs are being created and not all lenders offer all programs. You also need to find out exactly what documentation a lender will require to apply for any program.
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Forbearance:
Many homeowners lose the ability to pay their mortgage due to unforeseen circumstances, such as job loss, medical problems, divorce or loss of an income producing tenant. In these circumstances, if the necessary income is expected to return, forbearance by a lender can save a home. In forbearance, the lender waives monthly payments for a fixed period, usually six months, and converts the unpaid interest into additional principal. After the forbearance period ends, the borrower must start making monthly payments, either based on the original payment amount with a balloon payment due on pay-off, or a higher amount based on a new amortization which includes the unpaid interest.
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Loan Modification
A loan modification is a more permanent solution than a loan forbearance. Essentially the lender agrees to modify one or more terms of a loan to help prevent the borrower from default. The ultimate goal of any modification is the reduction of the monthly payment to a level that the borrower can afford based on their income. Modifications can reduce interest rate, reduce principal due, convert a loan to a balloon mortgage, shifting some principal payment to the future, or lengthen the loan term. Every lender is different but for borrowers with high interest adjustable rate loans, a modification reducing interest to low fixed rate terms can be the difference between keeping and losing a home.
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Short Loan
A short loan is a new program that allows a lender to reduce a borrower’s loan based on the decline in value of the mortgaged property. A new appraisal is done and the loan balance is automatically reduced to ninety percent of the current value, with the old loan balance forgiven by the lender. This program has limited availability at present but availability is expected to expand as the crisis continues.
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Deed-In-Lieu
A deed-in-lieu of foreclosure is a traditional method for a borrower to avoid foreclosure. Since the purpose of a foreclosure is to divest the borrower and any subordinate lenders of ownership, a deed-in-lieu can be a solution to a borrower avoiding an extreme credit damaging foreclosure. The key to any deed-in-lieu is that the property has to be free and clear of any junior encumbrances, such as second mortgages, association liens, tax liens or judgments because in a deed-in-lieu, the lender takes subject to such encumbrances.
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