Life After Paying No Bills For A Year
As the number of families facing potential financial hardship grows, so does the risk that they default on their mortgage loan. However, although most people understand what defaulting means, only a few are prepared to recover from a mortgage loan default. In fact, many homeowners believe that defaulting on their mortgage means immediate foreclosure.
Recovering from a mortgage loan default takes knowledge of how the process works and what your options are. This includes understanding how lenders manage late payments and when does a mortgage default translates into a foreclosure. In this article, we offer some suggestions to help homeowners recover from a mortgage loan default.
What does defaulting a mortgage mean and what are its consequences?
One of the most common consequences is the hiking of interest rates. Some lenders may require the defaulter to begin a new repayment scheme that is associated with a much higher interest rate. This sudden increase in monthly payments can put the economic capacity of a family at risk, possibly pushing them into financial hardship.
Another negative outcome of defaulting on a mortgage loan is foreclosure. This is perhaps much worse than having to make repayments at much higher interest rates. It involves the sale of the property and the subsequent transfer of ownership. The lender may choose to keep the property for future use or may simply sell it off to recover all or some of their money.
There are steps that a borrower can take to deal with defaulting on a mortgage loan. Not all hope is lost when someone defaults. The major steps that a borrower can take are given below.
Negotiating with the lender
Mortgage penalties are not always slapped immediately after a default. Actually, the cases in which consequences follow the missing of a payment date are quite rare. Rather, most lenders give as much as 10 days before summoning the borrower and an additional 90 days before a default notice is issued. Depending on their current financial situation, borrowers may use this period to find money and make a monthly payment.
If this time frame is still not sufficient, borrowers may enter into a new deal with the lending institution. Such deals are usually meant to allow borrowers to find extra means of paying for the mortgage and often involve providing an extension to the existing repayment period. This offers the borrower a chance to get back on track. How long the recovery period lasts depends on the lender. Some financial institutions give borrowers between three and five months, while others might wait up to a year.
Most lenders will require borrowers to offer a guarantee that, once the grace period ends, payments will resume with no issues. Lenders will not approve negotiation requests unless they are convinced that the borrower will be able to start making payments after a few months. In some cases, borrowers will have to make larger payments once the grace period is over to make up for the time they were not asked to pay.
Applying for the modification of loan terms and conditions
Apart from striking a deal that grants the borrower a grace period, it is also possible to apply for the complete alteration of the terms and conditions of the mortgage loan. Federal law allows borrowers to have their loan terms altered provided certain conditions have been met. For example, the Home Affordable Modification Program that has been put in place to help individuals who are struggling to make timely mortgage repayments.
There are various changes that can be made to a loan as determined the coordinator of the program, including extending the length of the loan, reducing interest rates by a certain amount, and lowering the principal. The goal is to make sure that the person is able to make payments without struggling too much. Not all borrowers may apply for the loan modification program. Rather, only those who have met certain eligibility requirements may be allowed. In order to seek the involvement of the program, the borrower must have faced a well documented financial hurdle that can be backed by the lender. This is in addition to having a reliable source of income.
Exploring Keep your Home Programs available in various states
Some states have programs that were put in place to help individuals who are struggling to make monthly payments. These differ from the modification programs because they provide financial assistance to borrowers without renegotiating the mortgage. Several states operate various programs that offer financial help to mortgage defaulters and those who are on the brink of defaulting.
Depending on the state, as much as $25,000 may be provided. For example, unemployed homeowners in the state of California are entitled to $3,000 as monthly redemption allowance to help them avoid defaulting. This value may be higher or lower depending on the financial state of the borrower and how much money is available through the program. Such programs are available to homeowners who have defaulted and those who have not yet defaulted but have been subjected to penalty fees such as late payment charges.
Hiring a foreclosure counsellor
In cases where a foreclosure appears to be imminent, there may be a need to hire a foreclosure counsellor. Such a step is necessary if the chances of losing the home are quite high and especially if a foreclosure notice has already been issued. Such counsellors are equipped with the necessary skills and information to enable a borrower to successfully avoid the sale of the house. In this way, it is possible to increase the chances of keeping of a home without having to spend too much extra money.
Finding the home’s equity value
The equity value of a home may be a means of survival in the worst case scenario. In mortgage loan terms, equity is simply the amount of money that a house is worth after considering the value of the debt. It is the difference between the current market value of the home and the total amount owed. This value can be positive or negative depending on the market value of the house. When it is negative, the house is worth less than the value of the mortgage. The converse is true in cases where it is positive.
To get the correct market value of the home, it is advisable to get in touch with a professional property evaluator. Such individuals are able to check the market information coupled with assessment tools to determine the actual cost of the house. Hiring a property evaluator can cost between $300 and $1,000, depending on location. If the home has a positive equity, selling it can be one of the options to settle the mortgage loan. This process is often called a short sale and homeowners must receive permission from lenders before they can sell the property.
Additional information for mortgage defaulters
In addition to the steps above, there is specific information that borrowers must bear in mind. First of all, state laws on mortgages may vary. A borrower must be fully aware of local laws and regulations to avoid being caught by surprise.
For example, the Truth in Lending Act says that lenders must clearly state how much is the annual mortgage interest rate. If a borrower has defaulted, one may use such information to make financial decisions. Further, closing cost fees must not exceed 3 percent of the total loan value as stipulated by the Anti-Predatory Lending Act. Other laws may impose further restrictions on how lenders can answer to a potential default.