Q: I purchased a home five years ago with an 80/20 home loan. (FYI — I have a 10-year balloon on my $40,000 second loan, which has a 9 percent interest rate, and my first is at 7 percent.) The bank encouraged me to do two loans to avoid paying mortgage insurance. However, the market changed within six months of my purchase. Now I’m "underwater" and I can’t refinance.
My house was on the market for seven months, to no avail — some of the homes on my street have been foreclosures that sold for nearly half of the value! Now, I need to retire in a few months due to the poor health of both parents. My income will be reduced. Can you tell me if I qualify for a loan modification program? Do I have any other options? –Jacqueline, Memphis
A: Too often on today’s market, homeowners start flailing around and making moves based on what they read and hear about the market, despite the fact that nothing has actually changed in their personal situation. So let’s start by taking a look at what hasn’t changed for you.
Your balloon payment isn’t due for another five years. You haven’t mentioned that your mortgage is adjusting anytime soon. Sure, the interest rate is quite a bit higher than the current rate, but it doesn’t seem as though your mortgage payment has or will increase anytime soon.
In an ordinary case, I would suggest that you consider sitting still, assuming that the home still works for your life and you want to hold onto it.
Now, let’s look at what has changed, or will soon: (a) the market value of your home, (b) your ability to resell the place, (c) your ability to refinance your home, and (d) your plans for your life (and your income).
I increasingly see and hear of situations like yours, where it seems that the change in the market may have given people some hope that the bank should grant them a reduced payment or modify their home loan, when the fact is that (a) loan mods are difficult to obtain even for people who can document an involuntary financial hardship, and (b) if the market had not been depressed, the bank would not reduce your mortgage because of your retirement plans or family illnesses.
The best loan modification candidates, in my experience, are homeowners who had fallen behind on their mortgages because of a temporary job loss, and are back on their feet and back to their old income (or better) by the time they are requesting help from the bank.
Had the market not been depressed, you might argue, you would have simply refinanced or sold the home. While that’s true, my job is to equip you with expectations about what is and isn’t possible, or even probable in the reality of today’s market. The reality is that the bank will not care much that you need to take care of your parents.
Now, let’s talk about your options. First, you should get clear on whether you’d like to keep the home or divest of it. If you would like to hold onto it, I suggest you get help applying for a loan modification by contacting the Neighborhood Assistance Corp. of America at www.NACA.com — they have a nonprofit arm that offers loan modification advocacy for consumers at no cost, and they are extremely successful at obtaining modifications that have a high likelihood of long-term success.
I urge you to contact them before you retire or have any other changes in your income, and that you hold off on any changes to your employment or income until you have a final answer from the bank on your loan modification.
If you’re not attached to the home and/or would prefer to divest of the home, I encourage you to relist your home for sale, as a short sale. A short sale is a transaction in which the home is sold at less than the amount the owner owes on the outstanding mortgage(s).
To go this route, get referrals from your contacts or neighbors who have worked with an agent they love. Interview agents until you find one with a strong track record of successfully closing short-sale transactions on behalf of other sellers they’ve represented — and ideally has closed a number of short sales with your particular mortgage lender(s).
There is no guarantee that your bank will green-light a short sale, but it’s the first option you must take if you are ready to let go of your home.
If that doesn’t work, you have two other options: (1) a deed-in-lieu of foreclosure and (2) strategic default, commonly known as walking away.
A deed-in-lieu is simply a voluntary agreement to take your home back, but most banks will not even consider a deed-in-lieu application until your home has been listed on the market as a short sale for 90 days or longer.
Walking away has strong pros, cons and ethical considerations — to explore this option more fully, check out my consumer white paper, "REThinking the Walk Away," and consider working your way through law professor Brent White’s book, "Underwater Home: What Should You Do If You Owe More on Your Home Than It’s Worth?" (Create Space, 2010).
No matter what route you decide to go, I’d encourage you to get input from a local real estate broker or agent and a local real estate attorney, who can educate you about the tax, legal and financial ramifications of whatever path you elect to go down.
