While home loan modification programs vary somewhat depending on the lender, they all serve the same purpose: to help homeowners facing financial hardship to the point that they’re having trouble affording their mortgage payments. To avoid foreclosure, homeowners may reach out to their lenders to work out an agreement to get back on track.
Whether it be a payment plan to repay the missed payments or a complete restructuring of the loan, a home loan modification can get homeowners back on track to financial health. Unfortunately, not everyone qualifies for loan modifications. There are requirements that need to be met, including income qualifications, property condition, and more. My goal here is not to cover the specifics of getting a loan modification; it’s to address what homeowners can do when they’re denied.
Rent the Property
While this doesn’t keep homeowners in the home, it enables them to keep the home. I especially recommend this if A) rent would cover the mortgage and taxes, and B) if they foresee being able to afford the mortgage on their own again down the line. Having someone else essentially covering the mortgage will allow the homeowner to take a breath, rent something cheaper, and get back on their feet. But, if they realize that this financial hardship isn’t temporary, they may need to consider selling.
Selling the Property
Depending on the situation, selling might be the route one needs to take to get back on track. Selling breaks the shackles between the homeowner and that dark cloud of a mortgage sitting over their head. After selling, they can rent for a couple years and save up for their next home.
If a homeowner owes more than the property is worth (also known as being underwater), they will need to consider a short sale. This requires approval from the lender, which can be difficult. Why might it be difficult? Because the lender will be receiving less than what was originally owed to them, which is not something anyone would agree to lightly. If short sale approval is received but the property doesn’t sell, the lender may allow a deed-in-lieu of foreclosure. A deed-in-lieu, in essence, is when a homeowner hands over the keys of their property to the lender and in return, the lender forgives the loan. In some instances, the lender will even rent the property back to the homeowner for a few years, at market rent. Both a short sale and a deed-in-lieu will negatively affect credit scores. But, they won’t affect credit the way a foreclosure or bankruptcy will.
Lastly, it’s important to note that there are additional costs associated with all of the options listed above. Also, every case is unique. What might be the right path for one homeowner could be completely wrong for the next. Just know that there are options. I may sound like a broken record, only because I see it so often, but the worst thing a homeowner can do is stick their head in the sand. The time to act is now!
I have helped homeowners in Los Angeles and Orange County facing countless situations. If you have any questions about your options, please don’t hesitate to give me a call (310)916-3452.