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Go from Upside Down to Right Side Up (Part I): The Introduction & The Loan Modification

Over the past few years we’ve seen the housing market go from bad to worse.  Foreclosures are up, values are down, and homeowners are wondering when the next shoe is going to fall.  Have you had your house appraised lately?  In most cases, that value is going to be considerably lower than it was when you purchased the property.  Now the question is, how much do you owe on your mortgage?  Is it more than your property value?  Is it less?  If it’s more, your mortgage is considered “upside down” or “under water” – that is, you can’t expect to sell the property right now for more than you owe.  That’s right – something we never expected to happen has happened – property values have shrunk and people can’t sell their homes without coming up with extra money to pay off their loan.

You’ve been paying your mortgage year after year yet you find yourself owning no more of the value of your home than you did when you started – and maybe less.  It doesn’t seem fair, does it?  Unfortunately that’s the way of the world right now, so what can we do about it?

Let’s first point out that if you don’t intend on moving anytime soon, the effect on you may be limited or nonexistent.  You’re going to pay your mortgage as you always have.  Just close your eyes and ears to what’s going on with property values right now.  You’ll just continue on as you expected when you purchased the property.  Eventually you’ll want to move, but by then we hope property values have gone back up.  If not, then come back to this article then and think about what to do again.

Now if you do not fall into the above category, and you need to do something now, there are five basic methods of solving the problem: (1) Payment Plan; (2) Loan Modification; (3) Sell the property, including at short sale; (4) Deed in Lieu of Foreclosure; (5)Foreclosure.

(1) Payment Plan; (2) Loan Modification

Load Modifications and Payment Plans really belong together in this discussion.  They are the only two methods, of the five listed above, that allow you to keep your home.  All of the others result in you moving through one method or another.  They simply try to save your assets and credit score.

Both methods are similar and are generally applied for in the same way.  Entering into a payment plan with your bank generally indicates that they have delayed some payment requirements but that eventually the entire balance of interest and principle will be owed.  A loan modification, when approved by the bank, may reduce your principle balance owed, or your interest rate.   Either of these has obvious advantageous benefits.

When you want to apply for a loan modification or payment plan, you are really asking your bank to give you a break.  You are asking the bank to make it easier for you to make your payments, thus helping them regain more of the mortgage they gave you, even if it isn’t as much as they expected to get back, or as fast as they expected it.  To apply in either case you need to contact the bank and have them walk you through their application process.  If this makes you uncomfortable you can have an attorney do it for you, but it’s often not worth it.  An attorney costs money and at the end of the day they can often do no more than you can on your own.

The bank will have you give it considerable financial information related to your assets, incomes, and liabilities.  It will then make a decision as to whether or not they believe a loan modification (or payment plan) is beneficial to them.  The process is not fast and certainly not painless.  It can take months and require constant attention, so be aware.

Remember, the bank is making this decision based on their interests, not yours.  Due to this, if you are in good shape they are going to reject the application – they think you can pay back the original loan agreement.  At the same time, if your financial situation is too serious they are still not going to approve it – they don’t think you’ll be able to pay back even a modified loan.  Loan modifications therefore work best for those that have had a reduction in income or circumstances, but are not unemployed or at a similar level of trouble.

Join us next time for Part II of this series: Go from Upside Down to Right Side Up (Part II): Selling the Property & The Short Sale

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