Consumers are getting shelled with letters, radio ads and offers from lenders and companies to modify home loans and “consolidate” debt.
It’s the same bill of goods: stay tied to debt you can never afford to repay. How many times do these commercials warn you not to file bankruptcy? I often wonder if they are trying to imply that you will lose your home if you file for bankruptcy. In the vast majority of cases, you can file bankruptcy and keep your home and avoid foreclosure.
What I hear when the ads warn you to not file bankruptcy is: don’t file bankruptcy until we’ve capitalized on your fears and taken every last cent from you before you have no other choice but to file bankruptcy. Your best bet when considering a loan modification, or a short sale, is to work with your bank or lender directly. Anybody in the middle will just increase your debt.
You’ve received that promising letter in the mail from your lender or third-party program to save your home: now what?
Go ahead and try, but prepare for a long, drawn out process and a lot of paperwork. In years past, some people report getting foreclosed upon during the process of negotiation the loan modification. Talking heads on the television will tell you that a bank will do anything to avoid foreclosure. Not true. The banks usually choose the route that leads to a more secure bottom line and improved risk portfolio. The banking industry does not sail their collective ship with a moral compass to reduce payments to keep you in your home. Some people who successfully get a mortgage loan modification still end up going into default soon after. There are exceptions, but be forewarned.
Take a good look at your budget. I like Dave Ramsey’s rule of thumb: “Limit your monthly payment to 25% or less of your monthly take-home pay.” Remember that if it is the loan modification that takes you under that threshold, you’ll pay a lot more interest in the long run for that sort term decrease in mortgage payments. If your loan modification won’t take you under that 35% threshold – you should take a deep breath and explore other housing options.
A short sale is where the bank agrees to allow you to sell your home for less than what you owe the bank. I think they call them short sales because it’s designed to leave the seller short. Watch out for short sale brokers, who you may end up wasting a lot of money on if the bank refuses to work with them. It is best to negotiate your short sale price directly with the bank. One of the dangers a short sale may bring you is that you will be responsible for any deficiency. So, what’s in it for you? You can avoid foreclosure and there is the possibility that it may give you favorable treatment for future credit. Surprisingly, walking away from the home via foreclosure can be a better alternative than dealing with a deficiency (provide they waive it via the foreclosure) than the nightmare of waiting month after month for a bank to approve the sale only to grant you the privilege of owing them a deficiency after the sale.
Why Loan Modifications and Short Sales May Not Work
It’s hard to tell folks sometimes, but there is a real possibility that some people cannot afford to keep their home, and no loan modification or short sale will change that reality. Debt counseling or working with our office can reveal a budget and give people ideas on how to move forward. There are options that wont involve increasing your debt load through debt consolidation schemes, loan modifications and short sales, and if you are faced with a difficult decision concerning your house, contact us for a low-cost initial bankruptcy consultation.