Dealing with Financial Difficulties... How To Save Your Home

People who have financial difficulties may find themselves in a situation where they know they can't continue making their mortgage payments. If that happens to you, come up with a game plan before you become delinquent. Here are the major components of such a plan: * Document your loss of income. This will position you to demonstrate to the lender that your inability to pay is involuntary, should this be necessary later on. * Estimate your equity in the house. Your equity is what you could sell it for after sales commissions and paying off your mortgage. This will help you develop a strategy for dealing with the lender. * Determine realistically whether your financial reversal is temporary or permanent. A temporary reversal is one where, if you are provided payment relief for up to 6 months, you will be able to resume regular payments at the end of the period and repay all the payments you missed within the following 12 months. Prove your case for the reversal being temporary in writing. If you can't meet these conditions, your financial reversal is considered permanent by the lender. If the change in your status is permanent, it means that you can resume regular payments only if the payment is permanently reduced. This requires modifying the loan contract: reducing the interest rate, extending the term, or both. You need to understand the position of the lender. While some actions you can take on your own, such as selling your house, other actions have to be negotiated with the lender. You do better in any negotiation if you know where the other party is coming from. The lender's main objective is to minimize their loss, of course. The action that minimizes loss to the lender depends on the equity you have in your house, on whether your financial reversal is temporary or permanent, and on whether or not you are dealing in good faith with the lender. Let's say you have substantial equity in your house. If you do, the least costly action to the lender may be foreclosure. While foreclosure is costly, the lender is entitled to be reimbursed from the sales proceeds for all foreclosure costs plus all unpaid interest and principal. They know they won't lose any money on the deal. While foreclosure makes the lender whole, it's a financial disaster for you. Your equity is gone, you incur the costs of moving, and your credit is ruined. You should always avoid foreclosure even if it means selling your house. If your financial problems are temporary, and you can persuade the lender they are, the lender may be willing to provide payment relief. The lender will probably prefer to keep your loan rather than to foreclose on it. The burden of proof is on you in this situation to demonstrate that the relief will really work. If your financial problems are permanent, sell the house before you begin accumulating delinquencies. In a high-equity situation, there is little hope that the lender will agree to modify the loan contract, so don't waste your time trying. Get out while you can. If you sell, at least you retain your equity and your credit rating. If you have little or no equity, and your financial problems are temporary, it will be easier to persuade the lender to offer payment relief. With no equity, the foreclosure alternative is more costly to the lender. If your financial problems are permanent, the lender probably will be willing to accept either a "short sale" or a "deed in lieu of foreclosure." With a short sale, you sell the house and pay the lender the sales proceeds; with a deed in lieu of foreclosure the lender takes title to the house. In both cases your debt obligation usually is fully discharged. (It does appear on your credit report, but it's not as bad a mark as a foreclosure.) The lender who can get all or most of his money back in these ways probably will not be willing to modify your original loan contract. Remember, they just want their money. If your equity in the house is negative (you owe more than the house is worth) but you want to remain there, the lender may give you payment relief, or make a contract modification if necessary to make the payment manageable. With negative equity, these may be the least costly options for the lender. Your Mortgage Advisor may be able to help you with your situation and it is always a good idea to sit down and talk with people that can help you through your difficult times.