Buying my home was the best investment I ever made!
I don’t hear that too much these days. In fact, I pretty much don’t hear that at all. A colleague of mine recently tried to refinance his house to offset an upcoming rate adjustment. He knew five years ago the adjustment would eventually occur, and even signed off on the loan documents to that affect as well.
Here we are five years later, and the story is pretty typical. Due to the slump in the housing market, the appraisal came in well below the original purchase price. Based on this appraisal, the application was denied.
The adjustment in the loan was pretty steep. Being that he is in the housing industry and business has been slow, he was not prepared to take the increase, nor can he stomach the fact that his payments will now adjust monthly. Considering the options, he requested a fixed rate mortgage at a significantly higher rate, but at least he would be set for 15 years, depending on the program.
Sadly, the loan was denied by underwriting due to the amount of the loan versus the current value of the home. While deciding on what his next move should be, he was not able to make that next month’s mortgage payment on time. Luckily, the lender waived the late fees since the payment was made only twelve days late. But the following month, the payment was not made at all. Actually, the payment wasn’t made for two full months.
Though the situation may seem dire, when faced with this type of circumstance, your lender can actually prove to be very helpful. My friend called me and explained that they were going to walk away from the house altogether. They subscribed to the fact that they would live in a rental apartment or home for the next seven years while the market straightened itself out, and so would that time be necessary to straighten out their credit from the foreclosure.
I suggested that they shouldn’t avoid the lender phone calls, but rather explain the situation, since I’m sure that they are extremely familiar with that story. The last thing a lender wants to do is foreclose on a property. Likely, they probably have a plethora of other foreclosed properties in their portfolio to begin with anyway.
The first option offered to him by the lender was to pay a set percentage of the mortgage each month. The remainder of the unpaid balance for that month would be added to the total amount of the loan. Though the program allows for a buyer to keep the property, it acts as more like a negative amortization product, which essentially adds principal to the balance, thereby increasing the payment.
The second option they called the ‘loan modification program’, was similar to the first option offered but would require my friend to come out of pocket the usual payment, in exchange for a six month grace period in the reset of his rate. In order to gain access to this program, however, he would also need to be completely up to date with all payments. So being two months behind in payments and the third month’s bill sitting on his desk, he needed to come up with three months payments to guarantee a freeze on his adjustable rate.
The third option was to short sale the property. The lender’s loss mitigation department was already prepared to negotiate on an agreement to discount the loan balance in order for the home to be sold at proceeds less than what was actually owed by my friend. The downside was a hit to his credit…but he was already willing to walk away from the property altogether and suffer the foreclosure, which probably looks worse on a person’s credit report.
After some tough decisions and the ability to pull money out of other stock and retirement accounts, he went for option two…which fixed his rate for an additional six months while he continued to make his monthly payments on time.
Was that the best situation for him? Absolutely not! But given the circumstances and the current status of the market, it was the best he could do without losing his home, and an option I fully supported for him and his family.
Not everyone has the available ‘emergency’ cash as my friend did, nor might they have the ability to re-negotiate their loan. Every situation is different. However, when faced with a difficult decision and facing a personal economic crisis, the best defense is to open the lines of communication with the lender and discuss the options available. As my friend found out, these days, more lenders are willing to help find the best solution to the problem to avoid that situation really turning ugly for all parties involved.