When You Can't Pay Your Mortgage

Dated: 02/10/2019

Views: 120

When "It" Happens

Before I became a REALTOR®, I worked in mortgage serevicing.  Those are the people who handle your payments and work with customers who meet challenges paying their mortgage.  I found a universal truth.  No customer I encountered wanted to be behind on their mortgage.  But, sometimes, life happens.  People fall behind for three main reasons:  A drop in income from a job loss or layoff; a serious illness piles up bills while reducing income from time off; or divorce splits the income of wage earners and increases housing costs because they now need two separate places to live.

So, what do you do when you see that keeping current on the mortgage may not be in the cards?

First, Avoid the DON'TS!

Stress does funny things to people.  No one enjoys admitting that they are in financial trouble.  The anxiety and feeling of dispair can be overwhelming.  You feel a know in your stomache when the phone rings.  You're sure it's a bill collector.  You can't sleep. Fear paralyzes you.  You find yourself focusing on the stress and fear and least able to make decisions on what to do.  So the first step is facing up to it and asking for SOLUTIONS from the people who can help.

Don't avoid answering the phone.

Don't stop opening the mail.

The phone calls from the mortage company or creditor are a lifeline.  The representatives on the other end will ask for payment, certainly.   That's the best outcome for their company.  But guess what?  They often have options for you two.

The same thing is true of those letters you're getting! Yes, they point out that you are behind and that a remedy must be found to avoid bad things happening.   But there is often information on options you have with the lender and community services that you can tap.

Do the Do's!

First, map out what you owe, what is in arrears now and what may be soon?  Write it down.   Add it up.  

1.  Start with a snapshot that is where you are today.  List every payment that is due in the next 30 days.  Total it up.

2.  Write down how much money you must have for food, utilities, getting back and forth to work or job hunting, medications and any other absolute essentials each month.

3.  Is your situation temporary or likely to be permanent?  Are you laid off or unemployed?  If you're having an "interruption of income" but it's likely to correct in weeks or months, there may be different options the lender can use to help.  If it's permanent, you may need to look at ways to sell the asset, try to capture any equity you have and move on.  I know that sounds tough, but in the long term will put you on more solid ground financially and emotionally.

3.  Prioritize your bills.  Your bills fall into two categories:  Secured Debt (like your mortgage or car payment.)  These debts are secured by an asset like your house or your car.  If you don't pay these, you don't get to keep the asset.  They are your first priority.   Unsecured debt is not tied to an asset.  It's debt like credit cars or personal loans.  These will rank lower in our plan. Once you have agreements on your SECURED debt, then contact the other creditors for options.  Many will agree to a lower amount to settle the account, IF you can show you have made arrangements on secured debt.  NEVER accept an agrement to move the debt from unsecured to secured, by taking out a second mortgage, for example, or using another asset as security.

4.  Get on the phone and find out your options on the secured debt first.  Write down the name of each person you talk to and note the date and time of the call.  Give the mortgage company, bank or other lender a picture of your situation and get your options.  The earlier you do this the better. 

Not behind yet but think you soon MAY besoon?  Call anyway!  You may have options such as making reduced payments, if the income interruption is temporary.  This can happen when a manufacturing plant closes temporarily for retooling. Government employees with jobs that are normally consider very secure are not paid if there is a shutdown.   In those cases, the lender may grant a "forebearance agreement."  These can range from an agreement ranging from skipping payments to reduced payments, or agreeing to let you pay just the interest and make up the escrow and principal payments you miss over time.  They may offer a loan modification that changes your payments permanently and rolls the amount you got behind into the future payments once you're back to work.  This allows you to get current without the added burden of paying an extra amount on a repayment plan.

  • 4.  Ask the lender for ALL your options.  From the lender's point of view, it's easy to rank THEIR preference on how you resolve it, when you're behind.   In order they would like
  • Payment in full.
  • A payment plan that makes the future payments due and adds a portion of the arrears until it's all caught up.
  • A modification of the loan that changes the term, interest rate or both. 
  • Having you liquidate (sell) the property.  That sale will either satisfy the loan when you pay off the full amount you owe and allow you to keep the rest of the sale proceeds OR the lender may even agree to a "Short Sale."   A short sale means you have their permission to sell the house for less than the mortgage amount.  The lender agrees to accept that amount and not pursue the difference.  Why would they do that?  Because they will have additional costs if they foreclose!  If the short sale means they lose LESS, they may be willing to accept it.  But you will have to show a good faith effort to sell the home by lising it, having it advertised for sale and allowing it to be shown.  You won't be able to sell it to a relative or coworker on a short sale.  It must be to an unrelated third party.  Most lenders will require that you use a REALTOR® and place the lsting on the MLS, before they will accept it. 
  • They may accept at deed in lieu of foreclosure.  That's your agreement to give them the deed to the property and walk away, owing no more.  This option normally requires you list the home first and attempt to get an offer first. 
  • Foreclose on the property.  I cannot think of a single circumstance where this is to a seller's advantage.  You lose the home, have an SEVERE impact on your credit and risk a forced eviction where your personal items can literally be placed at the curb by the sheriff.  The property will be sold at a foreclosure auction.  The lender will specify a minimum bid amount, in most cases or they will take the property and attempt to market it after the foreclosure auction grants them the deed.  You may STILL be sued for any remaning amount you owed plus the additional costs of recovery!  With the other options above, there is less credit impact and even on short sales or deed in lieu of foreclosure that forces you to move, the lender may provide for few thousand dollars for you to use to relocate provided you are still occupying the home.

Did you notice that the LENDER puts foreclosure at the bottom of the list?  It costs them money to foreclose, makes them responsible for marketing the house afterward and makes them liable for maintaining it while it's empty. If you have the image of the evil banker eager to foreclose on you in your mind, get rid of it. 

The lender does not want your property.  They just want the money they owe their investors.  You see, they didn't loan their own money!  They received money from an investor through bonds or deposits in return for a promise to the investor that they would pay them a return on the investment.  Then, they loaned the money to you, charging YOU interest as you repay it.   They pay back the investor and keep a portion of that interest to pay their employees and make a profit.

But lenders realize that not every loan will be repaid.  Life happens and sometimes it just isn't possible to make the payment.  Everybody is losing in this deal.  Now it's a matter of everyone reducing their losses.

WRITE A HARDSHIP LETTER

Sit down and  write out a letter that explains what caused you to fall behind on the debt and your desire to find a solution that works for everyone.  If you are fortunate enough to know when things will return to normal on the income side, if it is a layoff, then put that in the statement.  Tell the lender what resources you are using until you get on your feet.  Do you receive unemployment insurance, disability payments, etc?  Point out how this amount compares to your expenses like food, utilities and things you must pay to keep you and your family going.  This letter may be required by the lender to justify altering your mortgage in a modification or allowning a short sale or deed in lieu of foreclosure.  But writing it out will help you clarify your situation and give you a sense of taking action to overcome the anxiety a little.

Get your financial records together.  It's likey your mortgage company will require documentation like your last two month's bank statments, filling out their own financial form that shows your income and expenses and even copies of your recent tax returns to verify you don't have other sources of income you could use to pay.  To make some changes, like a modification, they may have to have these as proof that they are meeting their responsibility to their investors to make the best possible arrangements.

SEEK HELP OR ADVICE FROM PROFESSIONALS

Your local community may have non-profit organizations that help with financial hardhip, keep a list of local resources to help and can assist with getting your finances organized.  Some will even have personnel to work with lenders or creditors to work out a plan.  But a word of caution:  There are also businesses who do this for a fee.   Get the agreement on what they will do and what you will owe for the service up front and in writing.

Consumer Creidt Counselling is one of the best known names in the non profit category.  You can often find them by searching fo Credit Counselling online.  Narrow down the results by adding your city or zip code, like "credit counselling in Detroit".

Many REALTORS, like myself, have experience with short sales and all of them can provide you with information on the current market price your home commands.  Check with one.  It's smart to ask if they have done short sale transactions in the past.  It is a bit more complicated and the agent will have to work closely with your lender to make things happen.

SO WHAT IF I DECIDE I CAN'T AFFORD TO KEEP THE HOUSE?

First, congratulate yourself.  You're faced with a bad situation and you're thinking of possible solutions.  You're miles ahead of someone who has let fear paralyze them and waited until they are forced to take action.  Now it's time to assess where you are so you know how to get to where you want to be:

GET AN ACCURATE MARKET PRICE AND A PAYOFF FIGURE FOR THE MORTGAGE

What is the market price of your home?  It is NOT the taxed appraised value.  It is NOT the figures you see on Zillow or other online sites.  It is NOT the amount in the opinion of well meaning friends or ralatives. 

Tax appraisals vary WIDELY from actual market price and use formulas designed to provide the government entity or school district receiving the tax they need to operate.  They are never designed to be a measure of market price. 

Those online averages like Zestimate are determined using computer algorithims.  They're closer but still often wide fo the mare.  Here's what Zillow has to say about their own Zestimate.  The infomation was copied from their site with a copywrite of 2006 at Zillow.com:

"The Zestimate® home valuation is Zillow's estimated market value, computed using a proprietary formula. It is not an appraisal. It is a starting point in determining a home's value. The Zestimate is calculated from public and user-submitted data, taking into account special features, location, and market conditions. We encourage buyers, sellers, and homeowners to supplement Zillow's information by doing other research such as:

  • Getting a comparative market analysis (CMA) from a real estate agent
  • Getting an appraisal from a professional appraiser
  • Visiting the house (whenever possible)"

You have two ways to get an accurate market price:

  • Either pay for a professional appraisal or get a Comparative Market Value from an agent.   A professional appraisal is a snapshot of the home's value in THAT condition on THAT day in THAT market.  It will normally cost aroud $400 - $600 and may be higher for anything larger than a typical single family home or in some localities.  It can only be done by a professional appraiser licenses in the state in most area. 
  • A Comparative Market Analysis is an estimate of the homes market value determined by comparing the house to similar properties in the same subdivision or nearby area.  It is usually fee from most REALTORS®.  Agents offer it as a service and, in return, will offer to list the property for you.  If you decide to list with the agent, the listing agreement will state what fee you will pay the agent'broker from the sale proceeds and that the broker will pay a specified portion to the agent who brings the buyer.

Your home's market value is constantly changing.   Even if you got a value more than 60 days ago, it's out of date in most cases.   Most homeowner's will benefit most from contacting an agent who has sold homes in the same neighborhood and getting the Comparative Market Analysis from them.  The estimate can only be accurate if the agent vists the property and discusses any special features of the home or looks at the general condition of the property.  You can get a range estimate, using information the agent can access on similar homes that have been sold; but you want as accurate a value as possible.   Ask the agent for a Seller's Net Sheet.   This will show the amount you expect the buyer to pay, deduct all fees and costs, including commissions, recording fees and expenses you may pay for repairs to close the sale and give you a bottom line figure on what you will recieve.  

Once you know the market value of your home today, it gives you thestarting point for what you can do!   Contact your mortgage company and ask for a payoff amount on a date 30-60 days in the future.  This payoff amount will be the exact amount needed to make all payments for principal and interest due on that date.  Do not use the Principal Balance from your mortgage statement as the last word!  You will owe additional interest through the day you sell and may have fees, if the home has already entered the foreclosure process.  Can you sell the home once that process has started?  In most cases, yes, you can.  Your mortgage company may agree to delay that process for a short time or put it on hold while you market the home, if you contact them.

Is the market value MORE than the payoff of the mortgage?  Great!  Now, you and the agent can move forward to list and advertise the property to attract buyers.  Once it is sold, the title company or closing agent will pay off the mortgage and any commissions or fees due on your behalf and give you a check for the remainder.

But what if you owe more than the Comparative Market Analysis says it's worth?  That is a short sale situation.  It will still be much better to take this course than to have the property foreclosed or do a deed in lieu of foreclosure.  You will need to follow a procedure from the lender.  Usually, they will require you fill out their financial statment form, provide pay stubs, tax returns, bank statements and the hardship letter mentioned above.   Some lenders will even give you a "Preapproved Short Sale Amount" before you list the home or get an offer.  If you can get this, take the steps to do so.  You will shorten the time from the day you get an offer to the final short sale approval you will need from the lender.  Without it, expect it to take weeks or months.  And the buyer has the legal right to withdraw any offer up to the time it is approved by the lender.

WHY NOT JUST SELL IT MYSELF AND SAVE THE AGENT COMMISSION?

If your home is worth more than the mortgage payoff, you have that option, certainly.  But now you must advertise it so the information reaches the buyers who would be interested, be present to show it, negotiate the purchase price and who will pay for anything needed like title insurance for the buyer and lender, whether any repairs are required before the sale closes, the date of the closing and when you need to vacate the house.  You alone will be responsible for any terms of sale in the contract you sign to sell the house.  And you will be liable for any information you give about the home even after the sale.  If you use an agent, they will handle those tasks. (I list about twenty steps that I have to handle as an agent representing a client BEYOND the placing of advertising and marketing efforts.  Those tasks range from coordinating appraisals and inspections, to supplying and reviewing information from the titlle company, checking on the status of the mortgage process to make sure the buyer is on track to close on time, etc.)  In this day of scams and internet and identity fraud, it can be risky for a homeowner to do themselves.  Statistic show that homes sold by a professional agent sell for more than the cost of the agents' commission.  Most agencies have policies and procedures that help filter out scams and fraud attemsts as well. 

Another troubling fact is that properties that are transferred in For Sale By Owner transactions are much more likey to have litigation after the sale than those sold by a licensed agent.  Still determined to sell it yourself?  Good luck!  But please take this one piece of advice:  When in doubt, communicate and disclose!  Most states require that you disclose anything you know that is wrong with the property.  Fail to do that and you may open yourself to litigation that requires you to pay for the cost of repairs for that undiclosed defect.  An example?  You had an estimate to repair the foundation a couple of years ago.  You were in a bind and didn't have the work done.  It wasn't critical, just recommended.   Now you sell the home and don't disclose the foundation work the home needs.  You knew so you could be held liable to pay the cost of repairs TODAY....not just the two year old work needed.  I would recommend that you have any contract reviewed by an attorney before you sign, if you are not using an agent.   And you have the right to do that, even if you are using one.  Know what you're signing.  Ask about any part you don't understand and don't sign it until you are certain you  know exactly what you are expected to do and how much you will recieve AFTER deducting all expenses.

If you are doing a short sale, your lender will probably require that the house be listed by an agent and placed on the local Multiple Listing Service (MLS).  This gives the homeowner the best chance to obtain a higher price for the home.  Why do you care, if you're selling for less than you owe?   Because the lender may agree to let you keep some of the money to offset your costs to relocte.  You will need to agree that the property will be left the way you and the buyer agree is acceptable.  That is part of the negotiations when they make an offer.  Know whether the terms require it be cleaned with everything removed or if the buyer is responsible for that.  Once you have an offer you are willing to accept, your agent will submit it to the lender with any paperwork from you they require.  Once it's reviewed, the lender will either accept it, reject it or make a counteroffer that both the buyer and seller will need to accept before you can conclude the sale.

OFFERS TO CLOSE QUICKLY FOR CASH.  SELLER BEWARE!

I am an agent in the state of Texas.   Texas and some other states use a Deed of Trust to secure the property for the lender when you have a mortgage.   When a borrower falls behind on payments, that is public information and is accessible online.  Days after the first late payment, you may have think those letters that suddenly come in the mail offering to buy your home for cash and close quickly are a gift from heaven.  They may be, but be careful.  Often they use terms like, "a fair price for the property".  What does that mean?  Fair to whom?  Another red flag is an offer that names the buyer and adds the words "Or Assigns" to the buyer's names.  Usually, these are "wholesale offers".

What is a wholesale offer?   Just what the name implies.  The buyer is purchasing the property at a wholesale price and intends to sell it for a retail price or to sell it and collect a wholesaler's fee.  Look at the contract closely.  Are they offering to pay an option fee that gives them the right to withdraw the offer by a certain date?   If the contract contains, "or assigns" in the buyer's line, the intention may be for them to advertise and sell YOUR HOME for a higher price or for the price they are paying PLUS a fee to the assignee.  Why are they willing to pay cash, and close quickly? Because your home is WORTH more and they plan to keep the difference.  If they don't find a willing buyer, they simply let you keep the option fee and walk away.  They are not obligated to buy the property.  These offers are commonly 25% to 50% BELOW the actual, valid market price for the house in its present condition!  And did they actually buy your home?  Think for a moment.   They paid you a small option fee.  They found someone who WOULD buy it for cash.  They collected a non-refundable fee from that buyer and then assigned (or transferred) the contract to the buyer's  name.  What was the wholesalers total risk?  The option fee.  I have even seen systems where wholesalers are trained to collect money from the homeowner to take on the deal.  I was contacted by a homeowner who  encountered this and we sold the home on an MLS listing for 120% of the "cash offer" price.  I thanked the homeowner for giving me the opportuntity to help.  The homeownere made a comment that sums up many of the transactions that ocurr this way.  The homeowners told me theyh condisdered it because they were scared because they were behind and embarrased at the situation.  But they eventually decided to call me.  What was their opinion of the wholesaler?  "We don't admire their ethics, but you have to admire their audacity."  The key to avoiding a low ball offer is ger the Comparative Market Estimate or a professional appraisal as mentioned above.  Armed with that knowledge you can make a good decision.

QUESTIONS?   I'm glad to assist!  I even have free books to help!

From the time I was in loan servicing to today, I have become more convinced each day that home ownership is the first step to building wealth for most families.  But, like any investment, there is an element of risk.  None of us know with absolute certainty what lies in our future.   And that future, in terms of your mortgage, stretches out for years...ususally thirty years on the typical mortgage.   In that time, life happens.  Sometimes good things happen.   Sometimes, it gets a little rough.  But whichever way it's going for you and your framily, if you have a question about buyering or selling a home or what your options may be, I'm here to help.  Contact me by phone, email or text message.  I'll do my best to help.

I even have a series of FREE books on subjects like:

  • How to Sell Your Home for Top Dollar
  • FSBO:  Selling Your Home Yourself WITHOUT an Agent
  • How To Find The Home of Your Dreams Without Overpaying
  • What To Do With Your Home In A Divorce
  • Expired?  Why Some Homes Sell And Others Don't

I do restrict sending the books to families in the Fort Worth and surrounding areas.  They are actual books, not an electronic file.  But contact me here and I'll send you one.   I just need your email address for confirmation, your name and your address and I'll send it out.  (Nope.  No shipping fee or handling charge and no payment required.   I just ask that when you're finished with it you pass it on to someone else that might benefit from the information.  And, of course, I'd love to do business with you or them, if you like my approach.)

Do you know someone who has had a layoff, job loss, a divorce or lost someone and may be stuggling?  Have them contact me or a REALTOR® in their area.  Life gets better when there are options.

Some disclaimers:  While I am a licensed REALTOR® in the state of Texas (TREC License number 635229) I am NOT an attorney, a mortgage company emplyee, a licensed appraiser or a tax professional.  My answerss are from that perspective and do not constitute legal advice.

Blog author image

Michael Dryden

Michael Dryden has helped North Tarrant County families buy and sell homes using the skills developed over more than fifty years of work experience and over 25 years in North Tarrant County. Michael....

Latest Blog Posts

Eight Rules of Home Buyer's Etiquette

7 Unwritten Etiquette Rules Every Home Buyer Should KnowBy Liz Alterman | Jan 22, 2016MiltonBrown/Getty ImagesYou like being under a microscope? Whatever your answer to that question

Read More

When You Can't Pay Your Mortgage

When "It" HappensBefore I became a REALTOR®, I worked in mortgage serevicing.  Those are the people who handle your payments and work with customers who meet challenges paying their.

Read More

Renting to save property taxes and mortgage interest? Surprise! You're not.

Whose Mortgage Do You Want to Pay? Yours or Your Landlord’s?There are some people who haven’t purchased homes because they are uncomfortable taking on the obligation of a mortgage.

Read More

How Much Your Home Has Increased in Value?

Do You Know How Much Your Home Has Increased in Value?Last year we saw headlines about a possible housing market bubble, and many wondered if Americans still felt confident about the value of their

Read More