Many homeowners get behind in their payments and don’t know what to do or where to turn.

The Mortgage Bankers Association announced that a record 9.2 percent of American homeowners were either behind or in foreclosure at the end of June.

The cost of foreclosure can be far greater than the obvious consequences of a loss of a place to live and damaged credit.  Some employers require credit checks for security clearances, and a foreclosure could disqualify an otherwise qualified applicant.  For some public employees, such as policeman and military personnel, a foreclosure can be grounds for immediate termination.

One of the biggest mistakes borrowers make is failing to communicate with their lender after they miss a payment.

All major banks have loss mitigation departments whose sole purpose is to minimize loss for the banks.  Banks have developed creative ways to work with homeowners to keep them in their homes and avoid the costly foreclosure process.

A forbearance option is when the bank agrees to accept less than full payment or temporarily suspend payments. The money to bring a homeowner current might come from a bonus at work, investment, insurance settlement or a tax refund. Other possible bank negotiated solutions include changing the interest rate from adjustable to a lower fixed rate, extending a repayment term or even forgiving a portion of the loan.

One homeowner I counseled lost his job and missed two payments.  He contacted his bank and explained his situation and was able to do a loan modification.  His missed payments and penalties were added to his principle and his payment schedule was restructured to get him current. The key to his success was he communicated immediately with his bank.

For borrowers that can no longer afford to stay in their home, selling may be their best option. Average prices in June fell to $120,000 in Lucas County and $126,000 across Northwest Ohio from $126,000 and $134,000 in June, 2007, according to the Toledo Board of Realtors.

Today, nearly all banks will consider a short sale. A short sale is when the bank agrees to accept less for the property than what is actually owed. Each bank has their own guidelines, but generally speaking the bank will want to see similar documentation that a borrower was asked to supply a lender when applying for a loan. Banks look at the borrower’s financial picture and make a business decision partially based on that information.  Because of the number of homeowners that are in default of their mortgages, banks won’t generally render a decision to accept a short sale until there is a signed copy of a sales contract from a financially viable buyer.

With a short sale, the borrower’s credit will take a hit of typically 50-150 points, far less than a foreclosure which usually results in a 250-300 point credit score drop.  A foreclosure remains as public record on a person’s credit for 10 years.  A short sale is usually reported as “paid in full” or “settled.”

Some banks will agree to release their lien on a house allowing transfer of the title to a new owner in exchange for an unsecured line of credit.  This is called a short payoff.  Typically this unsecured loan is at a very competitive interest rate, as low as 0-2 percent over two to five years.  This option benefits the sellers because they are able to sell the property and they should receive no negative feedback on their credit report.

When homeowners get behind on their mortgage there are options available, but they have to keep the communication lines open with their bank and negotiate, negotiate, negotiate.

Todd Schenkenberger is licensed real estate agent with Danberry Realtors. He  is a certified short- sale specialist.  He can be reached at RealtorTodd@Danberry.com.

This entry was posted on Friday, October 17th, 2008 at 2:50 am and is filed under Exclusively Online, Money Matters, Special Section, Toledo Business Link.
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