Every homeowner in default has a unique situation, but there are specific courses of action to take. If money is available, he can pay down the loan or even pay it off, but generally this is hard for people to do when financially strapped. If there is time, he can put the home up for sale and wait for a buyer, but he must be realistic about the price. Houses priced lower than market value will obviously sell quicker than those that are full-priced.
Another option is to rent the property out and move somewhere that is rent-free, possibly with relatives, while getting back on one’s feet and waiting for the real estate market to appreciate. If the cash flow is positive or only a little negative, this can be a great solution.
Debt Relief and Home Loans
Asking the lender if they will allow the home to be sold for less than the loan is amount is called a ‘short sale.’ Most lenders avoid selling short, but it is still worth asking. Lenders have departments devoted to loan serving, including Loan Modification for troubled mortgagors. Talking to the department managers about modifying a delinquent loan to more favorable terms can’t hurt. The worst that can happen is that they say no.
One homeowner with two defaulted loans on his townhouse couldn’t pay his bills due to health issues that prevented him from working. The loans equaled the full value of the property, so investors weren’t interested in purchasing his townhouse, but he was able to work out a creative solution with one buyer involving a Deed in Lieu of Foreclosure. His buyer asked the second mortgage lender if they would sell the mortgage note to him at a discount, from $40,000 to a mere $5,000, which would give the property some equity.
Amazingly, the bank agreed. The buyer then bought this mortgage note, which gave him the legal right to reinstate the delinquent first loan. The two parties opened escrow with a title company, and part of the real estate sale was for the seller to receive $1,000 in exchange for signing a Deed in Lieu of Foreclosure contract with the buyer. The man had no equity so even $1,000 was welcome, and he was able to avoid worsening his bad credit. The buyer then assumed the first loan, giving him an instant $35,000 in equity, so the situation was a win/win for all.
Sometimes friends will advise declaring bankruptcy to protect the home from being foreclosed on, but this is just a delay tactic with serious ramifications for years afterward. Bankruptcy should be used as a last resort as it will inhibit credit repair and be a reason for future loan denials unless high interest is paid. Of course, an owner unable to pay his mortgage can simply walk away from the property and let the bank take it in foreclosure, but he may still have negative tax consequences and his credit score may be affected.
A primary residence is not just a house or an investment, it is a place where someone lives and calls his home. Therefore, it is necessary to understand the emotional component of one’s attachment to a house and try to put it in perspective. Prospective buyers and real estate agents do not share the memories of a homeowner, so keeping an emotional detachment when dealing with issues like value and price is best, no matter which course of action is chosen.