If you’re facing unexpected financial difficulties and have received a pre-foreclosure notice, you may think your options are limited. You may even have had a call from a real estate investor or two who strongly suggest selling your home to them. While that’s one option, you have several that may be better for you.
“But, Liz, why are you telling me this? You’re a real estate investor?!”
Because you are who counts. If you understand the options, you can choose what’s best for you, to either save your homeownership, or keep cash in your pocket and save your financial future. And, hopefully, you’ll remember Hawk & Home if and when you ever decide to sell your home.
Here are your eight options when facing foreclosure:
- Loan modification
- Forbearance agreement
- Refinance your mortgage
- Deed in lieu of foreclosure
- Sell your home to a realtor
- Sell your home to a cash buyer
- Sell your home Subject to
- Do nothing and lose your home
Option 1: Loan Modification
What is Loan Modification?
Loan modification is, by far, the best way to help you keep your home and manage your mortgage loan payments if you’re in financial distress. Most lenders would prefer to go through the loan modification process rather than dealing with the hassles of a foreclosure.
Unlike loan refinancing (which, unlike loan modification, involves costs), home loan modifications are usually only available to borrowers who are at a high risk of default. You’ll need to prove to your lender that you can’t afford to repay your home loan with the existing terms. If your loan is included in your lender’s portfolio, you’ll need to determine the qualifications of a loan modification with them. Lenders, however, often sell their home loans as part of mortgage-backed securities. If that has happened with your loan, you’ll need to work through the loan modification terms through the owner or investor of the loan. Remember that the lender’s goal is not to absolve you of your entire financial responsibility. (Wouldn’t that be nice?) You won’t be offered a loan modification if it seems unlikely that you won’t be able to repay the loan. So, if you lose your job and you don’t have any income coming in to pay your home loan, a mortgage modification could be a hard sell.
How do I qualify for a Loan Modification?
To qualify for loan modification, one of the following situations is usually required:
- If you’ve had a drop in income, generally due to a change in employment status or a salary decrease,
- If you’ve been injured or have incurred a debilitating illness that affects your job or job prospects,
- You’ve gone through a divorce where you and your former spouse shared housing costs,
- Local housing costs (e.g., assessed property taxes or homeowners’ association fees) have taken an unexpected and dramatic increase,
- You’ve had a death in the family that negatively affects your household income,
- Extensive property damage caused by natural disasters or situations that aren’t covered by homeowners’ insurance.
How can I get a Loan Modification?
If you’re interested in a loan modification, you’ll need to reach out to the servicer on your home loan. That might be your original lender, but the odds are that they’ve given up their mortgage servicing rights, which happens when lenders sell mortgage-backed securities on the secondary market. If that’s the case, you’ll need to speak with your loan servicer to help you determine if the owner or investor of your loan will consider a modification of loan terms and what conditions you’ll need to meet.
If loan modifications are allowed, you’ll need to make a case for why you deserve one. That means documenting whatever financial hardship is preventing you from paying your mortgage each month. Loan modification applicants must often fill out a “hardship statement” detailing their current financial situation.
To back up your financial hardship statement, you’ll need to submit bank statements, pay stubs, and tax returns to give your lender more insight into your finances. Before they decide for loan modification, lenders want to see that you’re living within your means. A high debt-to-income (DTI) ratio, for instance, would cause your loan owner to have valid concern about your ability to repay your loan even with a mortgage modification.
If the lender agrees that you qualify for hardship assistance, you’ll be approved for a loan modification. If not, you can appeal the decision and restate your case.
Loan modifications take on average 30 to 45 days to complete, so make sure you give yourself time to complete the process early on to avoid foreclosure. Here are some loan modification options that may be available to you:
- Changing your amortization schedule to spread out the cost of late fees and missed payments across the life of your loan,
- Changing the type of loan,
- Lowering the interest rate,
- Increasing the length of time to repay your loan,
- Lowering the loan principal (NOTE: This is rare!),
- Any of these options combined.
Anything Else I Need to Know?
Now, you’re probably wondering what a loan modification does to your credit score. Although you’ll probably see a slight dip, whatever dip in credit score you experience due to a loan modification will likely be temporary.
If loan modification doesn’t work for you, we’ll discuss a forbearance agreement next.
