3 Options for Homeowners Experiencing Financial Hardship

Homeowners who are experiencing financial hardship have a number of options available.  Understanding you options can help borrowers make better financial decisions.

Short Sale

A short sale, involves the sale of a property, for less than the amount owed to the lender. In other words the proceeds will not cover the borrowed amount. Short sales are not easy because price reductions must be approved by the lender.  The lender must agree to accept a loan amount that is less than the amount that was borrowed. 

A short sale goes takes approximately 3 to 6 months for approval. Although short sales are often difficult and lengthy, if you start early enough, it can be a viable option. The credit impact is not reported as an actual foreclosure, but will note the default and hurt a borrowers credit score.

Deed In Lieu of Foreclosure

A deed in lieu of foreclosure is when the borrower assigns the deed back over to the lender showing no interest in the property. Although it is not a common practice, it may a good option to avoid costly fees.
There lender will acquire the property faster and it becomes less costly for the lender to sell it again. A deed in lieu of foreclosure works when both parties agree to the terms. A lender will only take the property back if the value is currently at "fair market value," or value of other similar homes in the area, or if it will cost them more money to acquire the home is another way.  The credit report of the borrower also remains severely blemished.

Loan Modification

A loan modification can help many as well.  With a modification, the mortgage terms are restructured to lower monthly payments.  The situation can work well for both lender and borrower. The borrower is allowed to keep their home and negotiate an affordable payment and the lender does not have to incur the costly fees of foreclosure.  The lender achieves lower rates by either lowering interest rates, lengthening the loan or even reducing the loan amount. In many cases, the lender will use a combination of all three methods to achieve the desired result.

A loan modification begins with a hardship letter. The letter should address facts, as opposed to emotions.  Then, a borrower should contact their lender and let them know you are experiencing financial hardship and provide them with the letter . Once the lender receives the letter, the lender will evaluate all facts and provide the borrower with an application and request supporting documents.  The lender will review the application, supporting documents and letter and determine eligibility. The process can take 1-3 months. 

If a modification is approved, the lender will send the borrower the new terms of the loan. The fees to change the terms of the loans are usually low.  The credit report of the borrower may have mortgage lates and will thus be impacted negatively.