By Joaquin Benitez
What can you do if your home is slipping underwater? It will depend on just how deep it is.
Let’s consider the worst possible situation as an example. Say you are two months late on your mortgage payment because you lost your job, the unemployment insurance check does not cover all of your expenses, and your savings account is completely empty.
You have maxed-out all of your credit cards and you can no longer make the minimum monthly credit card payments. Furthermore, your house has lost 50 percent in value and you are locked in at a 5.5 percent interest mortgage rate, and to make the situation even worse, your car just broke down!
I am not sure that it could get any worse than this.
This example may sound like a joke, but this is the reality that many families are facing. I really hope this is not your case. However, if you are experiencing this or a similar situation, you may be wondering if anything can be done. The answer is yes, there is something that can be done.
Although there is no single strategy that you can use, a combination of strategies can be employed to improve the situation.
#1: Analyze your household finances in order to bring clarity to your specific situation. To do this effectively, you must create an income and expense sheet, listing every dollar that comes in and goes out of your house. Identify any unnecessary expense that can be eliminated or drastically reduced. Go over every item on this list and find a way to cut down your expenses.
#2: Look at household items purchased on credit from a department store. As you know, all department stores charge the borderline usury rate of 29.9 percent. If you have purchased something on credit that you do not use, find out if you can return it. If not, see if you can sell it on E-bay or Craigslist and use that money to pay off the credit card. Believe me, at 29.9 percent interest, you will never finish paying off that credit card.
#3: Determine the real value of your property. Use the free services of a qualified realtor. Invite one to your house for a market evaluation and once you have that number ask him/her to back-up that number with sold comparables in your area.
When considering your options, keep in mind that in real estate everything is negotiable. Let’s consider some ideas:
- Ask the bank agent for a lower interest rate on the balance of your mortgage. Would that help you avoid foreclosure? If they are willing to lower the interest rate, you could continue to make the mortgage payments.
- Ask the bank agent to forgive the late payments or to put the late payments at the back end of the mortgage. What that means is that they will add the payments to the balance of the mortgage. You will have to pay interest on that money, but at least you won’t have to come up with the money right away.
- Ask the bank agent for a reduction in the mortgage balance to bring it to par with the current market value of property (shorting the mortgage). That would be a huge step forward in avoiding foreclosure. Remember, you had nothing to do with your property’s dramatic drop in value. It is a reality of the current real estate market.
Why would the bank even contemplate such a ridiculous offer?
Consider the bank's options for a moment. In reality, they only have two: to scare you into making up the late payments in full or to continue the foreclosure process -- and the latter is not in the bank’s best interest.
If the bank chooses to continue with the foreclosure process, it will take six to eight months for the bank to obtain a court order to take back possession of your house. That means that they will not receive a single mortgage payment during that time.
That reason alone represents a few thousand dollars in lost revenue for the bank. During the foreclosure process there will be additional expenses such as court filing fees, lawyer fees, etc.
As you know, lawyers are not cheap and they have a tendency to charge astronomical fees, which the bank will have to pay. This will increase the losses by a few thousand dollars more.
The bank will threaten to sue you in order to recover their losses. However, if the bank sues you for the deficiency on your loan, you can declare bankruptcy.
In such a case the bank will have to absorb the losses. Due to their hard-nosed attitude towards the homeowner, when he or she is sued for thousands of dollars in a mortgage deficiency lawsuit, the homeowner has no other choice but to declare bankruptcy -- and the bank has ended up with nothing more than a tax write-off.
Once the bank takes possession of the property and you are out of the house, the bank still needs to spend more money hiring a managing company to take care of the property, continue to pay for all of the utilities, pay property insurance, and hire a realtor to sell the property.
These are significant expenses. Realtor fees alone will add a few thousand dollars. Not to mention that the property will most likely sit on the market for months due to the huge number of properties for sale. The bank will not receive any revenue related to that property during this time, which will increase its losses even more.
The most compelling reason why a bank may be willing to forgive a big chunk of your mortgage balance when facing foreclosure is the current market value of the property.
When the bank lists the property with the realtor, what do you think the listing price will be?
It will have to be the fair market value of the property. If they want a quick sale, they may have to lower the listing price below the fair market value. This is their reality and a compelling reason to consider your offer. If they stop to think about it, they will find that your offer is the best one that they are going receive.
I hope that by now the information I've shared has encouraged you. Unfortunately, the majority of homeowners do not have this knowledge and end up losing their home and ruining their credit.
Remember, when it comes to real estate, everything is negotiable.
What have you accomplished? You have reduced your interest rate and mortgage balance, thereby drastically reducing your mortgage payments. If the new payment is something that you can afford, your underwater problem is solved and you have saved your credit record from further deterioration.
Joaquin Benitez personally experienced foreclosure and is the author of the new book, The Foreclosure Phenomenon: How to Defend Your Home from an Impending Foreclosure, available at Amazon.com and BarnesandNoble.com.