Help! I owe more than my home is worth
Unfortunately, I am receiving more of these phone calls from homeowners. Their situation varies:
*Recently purchased or refinanced their home at the height of the market.
*Purchased or refinanced their home and the monthly payment is insufficient to pay down the principal. They have a loan with negative amortization, their loan balance increases every month.
*Their payments will be recast in the near future and they won’t be able to afford the new payment.
If they can’t sell the house and pay off the lender, they can:
*Recently purchased or refinanced their home at the height of the market.
*Purchased or refinanced their home and the monthly payment is insufficient to pay down the principal. They have a loan with negative amortization, their loan balance increases every month.
*Their payments will be recast in the near future and they won’t be able to afford the new payment.
If they can’t sell the house and pay off the lender, they can:
1) Sell the house in a “short pay” situation. This is where their lender agrees to accept less than the amount owed to them. Most likely this will have a negative impact on their credit and there could be serious tax ramifications. They may be required to pay tax on the “income” the amount that the lender has “forgiven”.
2) “Give the keys back to the bank”; loose the home in foreclosure. This will have a negative impact on their credit. They will need to check with their CPA but I don’t believe the homeowner will have the same adverse tax implications that they would in a short pay situation.
3) Make payments that they can’t afford on a loan that is more than the house is worth.
4) Contact your lender's "work-out" department. The bank will take back the property as a last resort, but it is far less arduous to them if they can come to terms with the homeowner and allow them to continue making some form of payment, even if it means setting up a "forbearance" whereby some payments are deferred until later. The catch 22 is that in order to prove hardship, one has to prove an inability to pay and with that comes a price. You have to be delinquent on your payments for them to take you seriously, but then your credit score is in steep decline.
5) I have heard thorough the “mortgage grapevine” that if you have a second and the first (not counting the second) is for about what the home is worth that some second trust deed holders are just “charging off” when you stop paying the second; because there is no equity for them to come in and “do anything” about it. Obviously each institution will act differently.
2) “Give the keys back to the bank”; loose the home in foreclosure. This will have a negative impact on their credit. They will need to check with their CPA but I don’t believe the homeowner will have the same adverse tax implications that they would in a short pay situation.
3) Make payments that they can’t afford on a loan that is more than the house is worth.
4) Contact your lender's "work-out" department. The bank will take back the property as a last resort, but it is far less arduous to them if they can come to terms with the homeowner and allow them to continue making some form of payment, even if it means setting up a "forbearance" whereby some payments are deferred until later. The catch 22 is that in order to prove hardship, one has to prove an inability to pay and with that comes a price. You have to be delinquent on your payments for them to take you seriously, but then your credit score is in steep decline.
5) I have heard thorough the “mortgage grapevine” that if you have a second and the first (not counting the second) is for about what the home is worth that some second trust deed holders are just “charging off” when you stop paying the second; because there is no equity for them to come in and “do anything” about it. Obviously each institution will act differently.
Yes, unfortunately this is it, there is no simple solution. IF you have a problem paying back your loan and it was a refinance or a second trust deed, note that in California these loans could be recourse loans and the lender could “hold you accountable” for the money not paid (the money the lender looses). If you are in this situation you need to speak with an attorney, perhaps a bankruptcy attorney before you make any decisions.
Another item of concern is what may be construed as lender fraud. The banks made these “stated income” loans where the borrower “stated their income on the loan application”. Come on, that was a joke, but there is "talk" that banks may come back to the borrower and claim that they “defrauded” the lender. I am just not sure how you “defraud” someone who knew they were getting lied to in the first place. Obviously this was the “point” of the loan: qualifying people who didn’t qualify.
Another item of concern is what may be construed as lender fraud. The banks made these “stated income” loans where the borrower “stated their income on the loan application”. Come on, that was a joke, but there is "talk" that banks may come back to the borrower and claim that they “defrauded” the lender. I am just not sure how you “defraud” someone who knew they were getting lied to in the first place. Obviously this was the “point” of the loan: qualifying people who didn’t qualify.
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