Short Sale and Mortgage Modification
Many homeowners in Florida fall behind on the mortgage. While homeowners would like to stay in their homes, that option isn’t always feasible. Outside of filing for bankruptcy, if a homeowner is in default on his/her mortgage, there are limited options.
One option according to The Balance is to try to obtain a modification of the loan. Another option is the possibility of a short sale. Determining which option is viable depends on a variety of factors such as the homeowner’s financial situation, the bank or mortgage holder’s willingness to work with the homeowner, and the desire of the homeowner to stay in the home. Other factors include the fair market value of the home (how much it would yield if sold) and the amount of the mortgage and/or other judgments, liens, or encumbrances on the home.
How does a loan modification work?
According to The Balance, the aim of a loan modification is to lower the monthly mortgage payment to an amount the homeowner can reasonably afford. Generally, the mortgage payment is lowered by:
- Reducing the interest rate
- Extending the length of time needed to pay off the mortgage
- Adding the unpaid interest to the balance due
- Reducing the balance of the loan
Most loan modifications don’t change the overall amount of the loan. The main goal of the modification is to reduce the current amount due. It may be in the homeowner’s interest to also consider refinancing the loan by paying off the current loan through a new loan. Refinancing generally is only viable if the interest current interest rate is substantially lower than the interest rate at the time of the original mortgage loan.
The Balance states that some banks act counter to what the homeowner wants. Instead of reducing the payments, they increase the payments – based on certain formulas such as using a certain percentage of the homeowner’s gross monthly income to figure a new mortgage payment
Some banks may consider a short-term (temporary) loan modification instead of a permanent loan modification. Here, the principal due stays the same. The payment is reduced for a short time such as three to six months. The idea is that if the homeowner can demonstrate an ability to pay the reduced payments for a short time, the bank might be more willing to consider a permanent loan modification. In essence, the bank wants to see a good-faith effort by the homeowner before considering a permanent change. Alternatively, at the end of the three-six month period, the bank could proceed to foreclose.
How does a short sale work?
A mortgage lender might consider a short sale for homeowners who are behind on their mortgage. Short sales are used when the amount due on the mortgage is less than the fair market value of the home. The aim of the short sale is to ensure that the mortgage holder does not come against the homeowner for a deficiency judgment for the balance of the mortgage due that cannot be satisfied by the proceeds of the sale of the home.
The homeowner and the holders of any mortgages or other encumbrances need to agree before the sale takes place that the homeowner will not be liable for any deficiencies. If the agreement is not in writing and isn’t properly prepared, a homeowner may be liable for any deficiencies or any secondary claims.
Generally, homeowners can only follow one option – a loan modification or a short sale. They can’t pursue both options.
When short sales may be a viable option?
Short sales, according to The Balance, are generally considered when the home is “underwater.” As mentioned, this means the value of the home is less than the amount due on the mortgage. Whether a bank or mortgage holder will consider a short sale depends on many factors such as the amount the homeowner is underwater and whether the homeowner has any ability to pay off the mortgage deficiency. Another factor is whether the real estate market is tight or not – how easy or hard it will be to sell the home.
The Balance states that the following factors should be considered:
- For credit purposes, both loan modifications and short sales are considered better than a foreclosure.
- Homeowners may be able to qualify to buy another home with a new mortgage and affordable payment – if they keep good credit for three years.
- Generally, short sales are the second option after the homeowner tries or can’t meet a long modification.
- Many loan modifications have an adjustable-rate payment which could increase after the first five years of payments.
How does a hardship factor in the loan modification or short sale discussion?
Generally, banks and mortgage holders are more likely to consider a loan modification or short sale if there is some sort of hardship to justify providing the homeowner with an economic benefit. Many banks and lenders will consider a homeowner’s distress – as compared to a homeowner who just isn’t willing to pay the bills.
Examples of hardships include the death of one of the borrowers (such as a husband or wife), the loss of a job, divorce, medical issues, or military considerations. Choosing to have children or add on a new pool is not going to be considered a hardship.
Speak with an experienced Indian River County real estate lawyer today
At Lulich & Attorneys, our Board Certified Vero Beach and Sebastian Real Estate Lawyers work with banks, mortgage holders, and homeowners when a mortgage is in default. We explain the various options for the debtor and the rights of the bank or mortgage holder. We understand when loan modifications and short sales may work and when other remedies may be necessary. Our real estate lawyers are skilled at negotiating agreements, preparing the contracts, and at enforcing economic rights in court. To schedule an appointment with an experienced Indian River County real estate lawyer, call us at 772-589-5500 or fill out contact form. We have offices in both Vero Beach and in Sebastian.