Mortgage assistance has been a hot topic in Congress lately and, unfortunately, will be a hot topic with consumers in the coming year. With over 1 million homes expected to face foreclosure in the coming year, it is important to know when to stay and when to walk away.
Keeping the House
The most important factor to keeping a home is the ability to pay the mortgage. If a borrower can pay their current mortgage, but will have trouble paying a new higher rate, it might be possible to keep the home. This does have some caveats, however.
First, the borrower will need to be able to pay the higher rate at some point in the future. For example, if a mortgage is set to double over the next year, a borrower can only expect to get a rate freeze for a year or less (anything more is truly a gift). If in a year a borrower’s financial situation has not changed, he/she will face the same problem with less recourse.
Second, a borrower should not be relying on a refinance. In today’s market, a buyer is lucky to maintain the value of their home, so it would be a very rare occurrence for a buyer to be able to refinance solely on property appreciation. If homeowners are attempting to hold on to their homes with the hopes of refinancing, they might need to hold out for two years or more. This is typically far longer than most borrowers can stay solvent in a foreclosure or close to foreclosure situation.
Finally, borrowers should expect to see additional fees or an increase in their loan amount. In lieu of upfront financing fees, many banks will add these fees to the mortgage amount, where they will accrue interest similar to the mortgage (or at a greater rate). This is par for the course if a borrower is able to keep their home and avoid declaring bankruptcy.
Walking Away
It’s time to walk away when the current mortgage is unaffordable. This typically happens to borrowers who have lost their job or experienced rate rests already. Many borrowers who experienced rests in the past few months may not have had the benefit of a rate freeze or may fall out of the assistance range for myriad reasons. For these borrowers the only option may be to walk away from their home.
Before walking away, explore alternative options. First, consider a short sale. If a borrower owes more than the home is currently worth, a short sale will allow the borrower to sell the home at the lower value and not have to pay any additional money to the bank. These have become far more common and at least help the borrower to save their credit.
Second, try to negotiate temporary payment freezes. This is very rare, but is possible. Keep in mind a borrower has to show a legitimate chance of making payments (including) back payments at some point.
Walking away from a home is probably one of the toughest decisions a borrower will ever have to make, but the sooner a borrower moves on the sooner he/she can begin rebuilding their credit and giving homeownership another shot.
