WHEN AND HOW TO SAVE YOUR HOME, FORECLOSURE AND BANKRUPTCY
- FINANCIAL HARDSHIP
- DECIDING WHETHER TO TRY TO STAY OR GO
- ARE YOUR PAYMENTS TOO HIGH?
- LETTING GO OF YOUR HOME
- HOW BANKRUPTCY HELPS
Experience a significant decrease in income or having a mortgage adjust to above affordability levels leads many San Diego homeowners into default. Anyone facing this situation is advised to consider several options: Deed in Lieu, Short Sale, Foreclosure, or Chapter 13 which allows homeowner to get current on the loan(s). Most individuals are capable of filling out the paperwork necessary for a loan modification. Paying for someone else to do this for you is not advisable.
WHEN FINANCIAL HARDSHIP IS TEMPORARY OR ELIMINATING CREDIT CARD DEBT MAKES MORTGAGE AFFORDABLE AGAIN
Financial Hardship is temporary it may be possible to bring save the home by filing for Chapter 13 relief. Under Chapter 13, homeowner brings the arrearages (amounts past due) current over a period of 3-5 years. If the residence is underwater and below the principal on the first mortgage it may also be possible to eliminate the second loan altogether, making the home affordable to keep. Call 619-285-1992 as soon as you receive your Notice of Default. The earlier you have your case evaluated the more time there is to set things right.
WHEN FORECLOSURE THREATENS: CAN YOU AFFORD TO KEEP YOUR HOME?
If you face foreclosure, realistically assess whether you should keep your home.
If foreclosure looms because you’ve missed some payments, or you think you will soon, it’s time to face what’s probably the toughest question of the whole process: Can you afford to keep your house?
Apart from the emotional considerations that surface whenever a foreclosure is threatened, there are economic factors you just can’t ignore. Before you can decide whether or not to try to keep your house, you need to take stock of your financial situation — which has no doubt changed since you bought your house.
- Three Basic steps
- determine if you have equity in your home
- decide if you can afford your monthly mortgage payments, and
- reduce your debt load
DO YOU HAVE EQUITY IN YOUR HOME?To a large degree, your options depend on whether you have equity in your house. Generally, your equity will be the difference between what you owe on the house and what you can sell it for. Unfortunately, many homeowners have negative equity — that is, selling your home would get you less money than what you own on your mortgage and other home loans.
These days it’s not so easy to know what your house is worth. Estimates of real estate values are traditionally based on the amounts that similar houses in the neighborhood have recently sold for. To find out that information, check out websites such as www.Zillow.com or www.housevalue.com. Local real estate brokers and agents can also give you an estimate by looking at similar sales in your neighborhood.
Unfortunately, as property values continue to decrease, it becomes next to impossible to determine the value of your property, especially if no houses in your neighborhood are selling. Or, if there are many foreclosures going on in your community, a house similar to yours may sell for far less than if you sold it outside of foreclosure. The only real way to find out your house’s market value is put it up for sale and see what happens.
If you have equity in your house, it may be worthwhile to try to hang on to your house. If you cannot afford the payments, see if you can reduce your payment through a loan modification and if you can reduce your other debt load.
If you you are significantly upside down (negative) when it comes to equity and you are behind on your mortgage payments from an economic perspective there is no reason to try to keep the house. How much upside down is significant? Probably more than 30% than what you paid for it. Your house’s value would have to appreciate by that much for you to break even and that in a normal real estate market is likely to take several years.
However, if you are upside down and still want to keep the house you might at least be able to reduce your mortgage payments by working something out with your lender or getting rid of other debts through bankruptcy or perhaps you can at least get rid of the second mortgage through chapter 13 bankruptcy with something called a lien strip.
If the monthly mortgage payments exceed 31 percent of gross (pre-tax) income you may apply for a HAMP modification before or after filing for bankruptcy. To qualify, HAMP, a homeowner must:
- Own a one to four unit home that is their primary residence;
- Have received their mortgage on or before January 1, 2009;
- Have a mortgage payment (including taxes insurance, and homeowner’s association dues) that is more than 31 percent of their gross (pre-tax) monthly income;
- Owe an amount that is less than or equal to $729,750 on their first mortgage for a one-unit property (there are higher limits for two to four unit properties) and
- Have a documented financial hardship.
Consider the Real Estate Market
If you are upside down on your mortgage or have little equity in your home, take stock of the real estate market before making your decision to keep or walk away from your home. If the market is slumped, and appears to stay that way for some time, your best option may be to let your home go. If the real estate market appears to be perking up (meaning prices may rise quickly), it might make sense to try to keep your home even if you have negative equity.
No formula can predict how soon a particular real estate bust will be over. But watch for signs that the market is either improving or stagnating. If some or all of the following factors are present, there’s a good chance the market is not headed for a speedy recovery:
- a collapse of the subprime loan market
- high numbers of foreclosures predicted to continue for a year or two
- an accelerated decline in residential real estate values
- an overall tightness of the credit markets
- a high likelihood of recession, or
- consumers who are tapped out and increasingly unable to make good on any of their debts, mortgages included.
There is no guarantee that your house will ever recover its original value. Don’t throw good money after bad. Unless the housing market rebounds soon enough your sacrifices to keep your house may be lost.
Many folks face foreclosure because their income has substantially decreased since first buying their home. Some were counting on the house’s value to increase, allowing them to replace an unfavorable mortgage with a more affordable one. Regardless of the reason for your troubles, before you decide to try to keep the home or move, you must determine if you can truly afford your current loan, or a refinanced loan. If you can’t, it may be time to let your home go.
There are several good ways to make this determination. Choose the one that works best for your situation, or use a few methods.
Use the Standard Ratios
As a general rule, the housing industry considers a loan affordable if your overall monthly mortgage payments do not exceed somewhere between 29% and 33% of your gross monthly income. This is frequently called your income to mortgage debt ratio. For example, if your annual gross income is $75,000, then your mortgage payments should not exceed $2,062 if you use the 33% figure. They should not exceed $1,562 if you use a more modest 25% income-to-mortgage debt ratio.
You should tailor these numbers to your particular situation. If you have a child with special needs or two kids in college for example, your mortgage payment might not be affordable even if it’s below the recommended 29-33% income to mortgage debt ratio. On the flip side, if you have few other expenses (perhaps you live simply, don’t own a car, or grow some of your own food), you might be able to afford a mortgage payment that exceeds the 29-33% figure.
Use an Online Calculator.
The Internet is chock full of calculators that purport to tell you how much house you can afford. They’re very easy to use, but use caution — they may make some assumptions that won’t work for you. When using these calculators, remember that the housing industry used them to determine what size loan you qualify for. They may be somewhat dated given the current chaos of the mortgage and credit markets.
Make a Budget
Another way to determine if you can afford your mortgage is to make a budget. Take a no-nonsense look at your income and expenses and see whether there is room in your budget for your current or projected mortgage payments. If the numbers don’t add up the first time around, see what you can trim.
You can also reduce your overall debt load through bankruptcy.
Finally, sometimes it is possible to stop paying your second or third mortgage– thereby allowing you to afford your first mortgage.
If you determine that it no longer makes sense to keep your home, take heart. Although it’s always painful to give up a house, keep in mind that doing so may make things much easier for you and your family in the long run. Also, if your house is subjected to a foreclosure sale, you will probably be able to stay in the house for months (in many states) without making any more mortgage payments — giving you time to save some money to move and secure new housing.
Even if you are okay with letting go of the house, it makes sense to consult an attorney. Here is why. There may be serious implications from foreclosure. If you have a second lienholder and that loan was created as a result of a refinancing, it is very likely that you will be sued for any deficiency on that loan. These suits are filed by companies, which purchase the debts from the original mortgage lenders. They are in the business of buying up that debt for pennies on the dollar and going after the debtor for recovery.
Obviously, the debtors can’t afford to pay back $100K+. If they could, wouldn’t they have kept their home? In most cases a suit such as this happens several months after foreclosure and it can be a crushing financial blow.
Here’s the problem. In some situations, prior to the foreclosure a household with income exceeding the California Median could have used the deduction of that mortgage payment (even if no such payments were actually made, even if debtor does not wish to keep the home) and often enough that deduction can make a difference between qualifying for a chapter 7, liquidation bankruptcy versus doing a 5 year repayment plan. The difference can be excruciatingly clear and painful.
You can file a Chapter 7 bankruptcy, eliminate the unsecured debt, including any deficiency on the second mortgage and wipe the slate clean OR have a foreclosure and if provided there are no other possibilities (such as an affordable settlement agreement) or some other way of paying the debt off, the debtor will be pursued for the difference and may be forced to endure a 5 year Chapter 13 repayment plan. Either way, you have much more negotiating power with the lender while the door to chapter 7 is still wide open.
Individual results vary depending on other circumstances. So, please, consult an attorney when you get your default notice just to get the facts. Have your financial situation evaluated. See where you stand before and after the foreclosure. A good attorney will not pressure you into any action. They will simply discuss options and provide with the information you need to make decisions that are right for you and your family.
DECIDED TO TRY TO STAY IN HOME
If you are behind on payments but wish to stop foreclosure, the only sure proof way to stop the Trustee Sale before it happens is to have steady income and be able to propose a repayment plan under Chapter 13 Bankruptcy. If a Trustee Sale has been set, DO NOT DELAY, the more time you have to prepare your case the better.
Under Chapter 13, you will be allowed to bring the loan(s) current within 3-5 years. Filing your bankruptcy will not modify the mortgage payments or reduce how much is owed on the first mortgage. (A bill was proposed to allow Bankruptcy judges to modify the terms of the loans but it did not pass). So as far as the mortgage payments go, chapter 13 by itself will not reduce the monthly mortgage payments or how much is owed. You are however allowed to apply for a loan modification under chapter 13.
Under what is known as a lien strip motion, if the following conditions are true it is possible to remove the second mortgage from the property:
- property is your primary residence
- property value is below the principal balance on your first mortgage
Note this is only possible under Chapter 13.
Other debts, such as property taxes, past due HOA fees, past due income taxes, child support/alimony can be repaid under the 3-5 year plan as well.
Debts such as vehicle loans may be restructured by either stretching out the payments, or lowering the interest, or a combination of both.
Unsecured non-priority debts (such as credit cards, medical bills) are also restructured. How much you will pay on these will depend on how much disposable income you have (that is income after taxes and other reasonable and necessary expenses). For example, let’s say that after your expenses you have $200 a month left over each month. Then your plan would pay $200 a month for either 36 months or 60 months to your credit card debts. If you owe $100,000 you would pay ($200 x 60 = $12,000) $12,000 or 12% or 12 cents on a dollar. If you owe $50,000 you would still pay $12,000 but would pay 24% or 24 cents on a dollar. This is because your monthly payment is not based on how much credit card debt you have, but how much disposable income you should have based on reasonable and necessary expenses for your household and your household’s income. Go here to learn more about how Chahpter 13 works
Chapter 7 offers some individuals in particular situations assistance such as:
- If you are not very far behind on payments in your mortgage and have sources of funds to bring the loan current or
- if you have not fallen behind on payments yet or you are falling behind because you are paying on other significant debts (such as credit cards, vehicle loans, medical bills) where discharging these other debts in a Chapter 7 bankruptcy will leave you with enough money to be able to afford either your regular mortgage payments or a modified mortgage payments after a loan modification.
Chapter 7 is not a good tool to try ot save a home from foreclosure where the borrower is behind several thousands of dollars. You see, foreclosure can still happen after you file for chapter 7 bankruptcy, although it will delay the process. If however you are willing to take your chances with a loan modification process after filing for chapter 7 bankruptcy this may be a possible route to try. there are just no guarantees that you can obtain a loan modification.
DECIDED TO LET PROPERTY GO
If you have chosen to walk away from the property one of the most important questions to ask is what will the financial obligations be after foreclosure or short sale. Will you still owe for a deficiency on a second mortgage? Will you be taxed on forgiven debt? Will you be sued for unpaid mortgage balances? Will you be responsible for unpaid HOA fees, property taxes? These are important questions that you might want to contact to discuss with an attorney.