What to do when your mortgage adjustments breaks your budget

Unfortunately, this scenario is popping up more and more. Buyers had either speculated that they would have had their home sold before this happened, or they'd be able to re-finance in a position where the mortgage was no longer in the position of needing Private Mortgage Insurance or a less than 80% loan to value, or even worse, their financial situation has changed. With the market slow down and the interest rates coming back up and the lending industry tightening their reins, home owners are finding themselves more and more in the position of being strangled by their homes.

The problem is also made worse by the fact that no one really wants to acknowledge they are in trouble until its things are horribly wrong. I have received several calls recently asking "How fast can you sell my house?" My answer, "2 days if you want to sell it for belly button lint and candy wrappers..." Usually most home owners regardless of their situation still see their home as being worth what the highest priced comparable of their home sold for. In a slow market like ours, that doesn't equate to a "quick sale". Also, if a homeowner has only been in their home for a short time they may be upside down in their home, (owing more than the home is worth), and if re-financing is not an option or doesn't fix the problem, then selling the home for less than it is owed becomes the only option, either by paying off the bank the extra owed amount or by proving an inability to pay off that amount and getting the lending institution to accept a "short sale".

The first step is to find out what your home is really worth, not what you think it's worth or what your neighbor Bob and Susan sold theirs for 6 months ago, but a realistic look at its value under current market conditions. This can be achieved by getting an appraisal, usually around $350 to $400, or get a real estate professional to provide you with a comparative market analysis. This requires a real look at the home, not a computerized average found on one of the many Internet sites.

Next you need to estimate what your closing costs would be based on the value obtained by either of the aforementioned processes. If you've used a Realtor to create your market analysis ask them also for an estimated net sheet based on a sale at appraised value, as well as at values $10,000 lower than appraised value. These costs will vary market to market, but in Nevada in addition to brokers fees the costs you will be expected to pay are

1/2 of the escrow fee

Title insurance

re conveyance fee to pay off existing loans

if you are in a Home Owners Association, there will be document and transfer fees

NV transfer tax, $5.1 per thousand dollars of sold value ($300,000 sales price, $5.1 X 300)

County recording fees

Once these have been tallied up, along with the amount currently owed you will find out how much you will either have to pay to get out from under the mortgage and start over, or how short the sale will be, or if a new financing option may be a better choice.

If you are in a worst case scenario, and refinancing is not an option, nor is there any money for paying off the short amount, a "short sale" may be the only way to go besides foreclosure.

Short sales are a better option for lending institutions, because in the long run, it keeps the property of their books (REO) and it is much quicker...sort of like ripping off the band-aid quick. This doesn't mean that the lender is going to be "happy about it". They are going to want to make sure you aren't able to cough up the remaining money, which means proving your inability to make the payments. If you show a $1,000 a month payment for a new 911 Turbo, they may want you to get rid of the car payment and give it to them instead...short sales are not an easy way out...nor are they quick fixes. They should be considered a last option before the "big ugly" foreclosure....

The steps to getting a lender on-board quickly is to contact the lender, or have your Realtor, with a signed notice of permission to discuss your financial information contact the lending institutions short sale department. Find out what they need to see to approve a short sale. If you have more than one loan this will be required of each lender.

Next get your financial information together, along with the reasons why you are no longer able to make your payments. If this is due to an exploding interest rate, it may make more sense for the lending institution to renegotiate a lower rate rather than risking the possibility of a short sale or foreclosure. The lending institution is going to want to see all of your assets and obligations, if you own a cabin in Big Bear, they are most likely going to suggest you sell it to pay what you owe, again, this is not an easy way out. Having this available for the institutions instead of waiting to see what they "really require" will save time. This process can take between 1 and 6 months, so have as much information readily available as is possible.

At this point, if your home isn't already on the market, the institution may require you try to sell it at a price high enough to cover costs, they may want to negotiate with the listing agent for a lower commission. This may happen again once an offer is presented on the home that is less than what is owed. The lender doesn't have to agree to a short sale, so if you receive an offer that is less than what you owe and have to pay it off, make sure you've listed in your counter offer that "bank approval" is needed for the sale. Otherwise the buyer can still enforce the contract regardless of what it will do to you.

Other things to consider is the tax burden. The IRS sees the amount you've been forgiven on your debt as taxable income, (ya I know, don't shoot the messenger) so if you have $50,000 in debt forgiven, Uncle Sam is going to squeeze you for income tax on that 50 grand.

The lender may require you to sign a promissory not to make payments on the remaining debt as well. This at least gets you out from having to pay the IRS...

This also may be a time that the lender looks at the information originally submitted for the loan in the first place. If they find fraudulent information was provided to obtain the original financing they may take a good hard look at whether or not you participated in loan fraud.

The most important thing in all of this is to be realistic in the first place. Don't count on future market conditions to enable you to make payments. If you see your situation is about to change for the worse, re-work your budget to make sure you can make your payments. If you aren't going to be able to, start the selling or re-financing process as soon as possible.

Talk to professionals about all of this as well. You wouldn't expect to be able to jump into a race car and drive it as well as someone that races every day would you? Talk to Realtors, Lenders and Tax professionals that run this race on a daily basis...it'll keep you off the wall.