What to Do If You’re “Upside Down” on Your Mortgage

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If you’re “upside down” on your mortgage, meaning you owe more on your home than the home is worth, what are your options? This is an incredibly common situation in today’s rocky mortgage climate. The upside is that because this issue is so common, there are quite a few options on the table.

Here are some of the paths open to you if you’re upside down.

==> Loan Modification

A loan modification involves changing the terms of your loan to make it more realistic for you in your current financial situation.

Call your bank and ask for the loss mitigation department. You’ll have to provide documentation of your income and expenses to prove that you really can’t afford the payments as they are.

==> Rent It Out

If you want to continue making your payments to your current loan, you can try instead to just rent out your current home and then rent a smaller place instead.

This is a great option if you’re living beyond your means right now and want to preserve your credit rating. There’s also the chance that your home price will rise in the future.

==> Do a Short Sale

A short sale is when you ask the bank for permission to sell the home and repay the bank with whatever the home gets, rather than what you owe on the property.

The bank is taking a loss on the property on a short sale. However, since you’re going to fetch a similar amount to what the bank might expect if they foreclosed it and sold it themselves, they’ll often say yes to this proposal.

That said, the paperwork and negotiation of the details can take a long time.

==> Deed in Lieu

This is where you just give the bank the house and have the bank forgive your loan. It’s like a short sale to the bank.

Why would the bank agree to do this? Because if they foreclosed, they’d get the same result (ownership of the property), but only after a lot of legal expenses. A deed in lieu deal spares them that cost.

==> Two Inglorious Options

Finally, you have two other less glorious options.

First, you could just walk away. Don’t pay the mortgage. The bank will eventually foreclose on the house, but that takes several months. In the meantime, you have a free house to live in for a few months.

This will wreck your credit but if you can’t get any of the other options to work, it may be your only choice.

And the final option is to just keep paying the mortgage. You may be upside down, but if you can still afford the payments, you can choose to just keep paying it.

These are the most common options available to property owners today. If you’re upside down, these options can help you reduce the fallout.


What Is Strategic Default and Should You Consider It?

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Since the 2008 real estate bubble meltdown, an unprecedented number of Americans have opted to do what’s called a “strategic default.” This is when you choose to default on your mortgage not because you can’t afford it, but simply because it makes more financial sense than any of your other options.

What specific conditions might warrant a strategic default? What are the ramifications? Should you consider it? Let’s take a look.

==> When to Consider Strategic Default

Almost everyone who considers strategic default is upside down on their home. That means they owe more on their mortgage than the home is worth.

Another common attribute is if there are no plans to purchase a home in the next five to ten years. If credit isn’t important to you, then walking away from a mortgage has little consequence.

Strategic defaults are common, although certainly not limited to, the elderly. If you’re retired and you’re living on a modest social security and pension check, why divert all that money into a losing investment for the next ten or more years? Instead, people choose to just walk away.

Perhaps you feel like you can’t make the payments anymore. Or perhaps you can, but it just doesn’t make sense to you. The home loan’s amount is for so much more than your house is worth, it feels like you’re just throwing money down the toilet.

So what are the ramifications?

==> The Moral and Ethical Questions

One important area people who are considering strategic default need to think about are the moral and ethical questions.

What does defaulting mean to you, as a person? What does it mean about your integrity and your word? What does it mean to choose to walk away from a loan, even if you can repay it?

It’s a question every person has to answer for themselves.

==> The Effects on Your Credit

If you default on your mortgage, you can pretty safely assume that you won’t be able to get any kind of credit card or loan for the next two or three years.

Furthermore, you probably won’t be able to buy another home for at least five to seven years.

==> Potential Legal Recourse

If lenders know that you’re earning more than enough to repay the loan but choose to walk away, they can choose to sue you.

If you don’t have enough money to make it worth their while, this might not be a concern. However, if you do have other assets that a court of law could get to, you may have to consider the potential of a lawsuit when you choose to default.

==> What It Looks Like

If you choose to action a strategic default, you get to live in what’s basically a rent free house until the bank forecloses on the home.

The bank will have to go through standard foreclosure procedures. Until that time, you still own the house. Once you lose the home, you can then move on to renting property or finding another place to live.

Strategic default is a difficult choice – not one to be made lightly, as its ramifications are huge in many different areas. That said, if you’re considering it, you’re not alone. Thousands of people across the nation have chosen this path and many more will continue to in the years to come.


What Is a Short Sale and How Does It Work?

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A short sale, if done well, can allow you to walk away from your home free and clear, even if you’re underwater right now. For many homeowners, a short sale is the only option that allows them to avoid certain foreclosure.

==> What Is a Short Sale?

A short sale is when a bank agrees to let you sell your home for less than the value of your loan. They’ll accept the proceeds of the sale and forgive the rest of the debt.

In other words, instead of having to foreclose on the house and sell the house themselves at market rate, they’ll let you handle all of that – and just take the money.

Doing a short sale is still bad for your credit, but it’s much better than a foreclosure on your credit report.

==> What Does the Process Look Like?

Start by talking to your lender. Your lender can help you walk through the process and explain exactly what your bank is looking for in a short sale.

You’ll need to arrange a buyer. The bank won’t do this for you. Instead, you essentially have to come to the bank with the paperwork ready.

If you want to work with a real estate agent to list your property, you need to first submit a letter of authorization to your lender. This allows your lender to disclose financial details to potential buyers and your real estate agent.

Try to work with an agent who has short sale experience. Selling a home on a short sale is quite different than a regular transaction.

A short sale involves negotiating with both the buyer and the bank. Instead of going back and forth between a buyer and seller, the agent essentially has to get the lender to agree to a price.

Though selling a home with a short sale is trickier, many buyers are willing to jump through the hoops for one simple reason: they can often get a much better deal than buying through the normal channels.

==> Closing a Short Sale Deal

In order to close a short sale, you need to have all your documents in order, as well as the agreement of your bank.

You’ll need to draft a hardship letter, explaining why you can’t repay your loan any longer. The worse your financial situation seems, the better your chances.

You’ll need to prove your income, your expenses and your assets. Furthermore, the bank will want a rough projection of how much they can expect to receive after the short sale.

If you’re underwater on your property right now, a short sale can help you get out. You won’t walk away with any cash, but you can preserve your credit and get away from those crushing monthly payments. In exchange, you have to be willing to put in the effort to make the short sale happen.


Is 2021 a Good Time to Buy Real Estate?

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Now that the 2017 real estate market is finally calming down, employment numbers throughout the country are gradually (though not steadily) picking up and the outlook in the country as a whole seems brighter, many people are wondering – is now a good time to buy real estate?

The answer is a tentative “yes.” There are many factors to consider. Here are some of the main reasons you might consider buying in 2017, as well as a few reasons why you might not.

==> Don’t Catch a Falling Knife

There’s a saying in the real estate investing world: “Don’t try to catch a falling knife.” That means don’t buy on the way down, because you never know how far the market could fall.

Instead, you want to buy once the market has already bottomed out and is just starting its ascent again. By all indications, this is where the market is today.

==> The “Resistance” Line of Thought

In stock, Forex and even real estate trading, there’s a concept called “resistance.” The theory says that if the value of an asset drops to a previous low but doesn’t go below that low, it’ll go up.

In other words, if the stock of company XYZ goes from 60 to 50 (the lowest point it’s been for the last three years) and stays at 50, that means that it’ll probably go back up rather than continue down, because there’s “resistance” at 50.

The same applies in real estate. When the real estate bubble crashed, the market hit its resistance point – the low point in 2017. It didn’t go below that. Many experts believe this indicates that the market is likely to only go up from here.

==> Rents Are Rising, Properties Are Available

Rents are usually a good indicator of where real estate prices are heading. Higher rents means higher returns on investment for investors, which means properties get more valuable.

Today, we’re at the sweet spot where rents are going up but properties are still available on the cheap. There are many creative ways to get cheap homes, from picking up foreclosures to short sales to desperate sellers.

==> Let Your Own Finances Decide

One thing to realize about real estate markets is that rises don’t happen overnight. When a stock shoots up in value, your window to buy might be just hours or minutes. Real estate is different.

Real estate prices rise over months and years. The cycles are much longer. Though prices are likely to rise in the near future, that doesn’t mean you should recklessly rush into buying property you can’t afford.

Today is absolutely a good time to buy real estate. But start by taking inventory of your personal financial situation first. This decision has to make sense from a personal standpoint as well as a market standpoint. The market today is poised to jump, so the decision really rests on whether or not you’re personally ready to buy.


Three Things to Try before Accepting Foreclosure

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If foreclosure is looming on the horizon, now’s the time to kick into gear. Just because you’ve had trouble making payments doesn’t mean you have to lose your home. Instead, if you take action quickly and work with your lender, there’s a very good chance you can avoid foreclosure.

These are three things you can try before accepting foreclosure.

==> Re-Amortization or Repayment Plans

If you still have a good source of income but have just fallen behind on your payments, a re-amortization plan or repayment plan can help.

These plans are predicated on you being able to make all your payments in the future. Meaning the loan as a whole works for you, but you just couldn’t pay temporarily due to financial hardship.

The way it works is your lender basically wraps up all your overdue payments into your old loan, then re-amortizes (redistributes) those amounts over the course of the loan.

Once your past due payments are re-amortized, you can continue making payments as normal.

Another similar option is a repayment plan. Instead of re-amortizing your back payments, you and your lender could just work out a repayment plan of some sort. This is tougher for you because the back payments will be distributed over a shorter time, say two years instead of 20 years. However, it’s easier to sell the lender on this than re-amortization.

==> Loan Modification

What if you just can’t afford your loan in its current condition at all? Your lender may still be willing to work with you.

In this case, you’ll need to completely rework your loan from the ground up. Different monthly payments, different length of the loan, possibly a different interest rate and payment terms.

A loan modification’s goal is to take your existing loan and transform it into something that makes more sense for your financial situation.

==> Short Sale, Deed in Lieu

Finally, if you really can’t continue to afford your home, you can still avoid foreclosure by working with your bank in an amicable way.

One way to do this is to help them find a buyer. If you can find a buyer for the home, the bank may be willing to accept the buyer’s bid and forgive any additional amount you’d owe the bank. This is called a short sale.

Another option is to do a “deed in lieu.” This is where you just give the bank the house. In exchange, the bank releases you from the mortgage. This helps the bank avoid the trouble of having to actually foreclose on the house.

Both a short sale and a deed in lieu will have a seriously adverse impact on your credit.

These are your options before accepting foreclosure. If you’re facing foreclosure, there are quite a few options at your disposal before it gets to that stage.


How to Get a Loan Modification

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If you’re underwater on your property and having trouble making payments, getting a loan modification could be a much more reasonable approach than a straight out default or foreclosure.

A loan modification involves restructuring your existing loan so that your payments drop below 31% of your gross monthly income. In other words, your bank will work with you to make sure you can afford your monthly payments.

How do you get a loan modification?

==> Save Up Your Late Payments

Many homeowners who’ve missed a payment or two decide to stop entirely – then spend the extra money. They use it to pay off other debts or just put it towards expenses.

This is a mistake. Instead of spending this money, put it away in savings. When you negotiate for a loan modification, you’ll usually be required to put up some “good faith” money.

Saving up your late payments will help you afford this when the time comes.

==> Gather Your Documents

The most important documents for you to gather are your expenses and income documents. You should have all your pay stubs, as well as proof of expenses.

That means things like your lease document, your phone bill, your utility bills, grocery bills and the like.

In order to make a case that you can’t afford your loan right now, you need to be able to prove each and every dime of your expenses.

==> Beginning the Talks

Call up your lender and ask for the loss mitigation department.

Keep in mind that there’s a good chance you won’t actually get directed to the loss mitigation department. Instead, often you’ll be forwarded to a collector instead.

A collector’s job is to try and get you to pay back the money through pressure tactics. On the other hand, a loss mitigation rep actually has the authority and means to work with you to restructure your loan.

If you get the sense that you’re dealing with collections instead of loss mitigation, ask to speak with a manager or hang up and dial again until you reach the right person.

Once you’ve begun the talks, be completely honest. Lay out your financial picture and let them know that there’s just no way you can afford the payments as it is.

Banks can be understanding. It’s often in their best interest to work with you rather than go in for a foreclosure. A foreclosure costs the bank a lot in legal fees and could result in a house sitting on the market for months. Also, they lose the difference between the loan amount and the market value.

So, banks will be willing to work with you. Just make sure you’re talking to the right person when you call – the loss mitigation department – and have all your proof of expenses and income in order.


How to Buy a Home after Bankruptcy

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There’s a common misconception that bankruptcy will kill your chances at getting a home loan. This isn’t true. In fact, surveys have shown that it’s possible to get a loan as quickly as 18 months after filing bankruptcy. Though that’s an exception rather than the rule, it’s not at all unreasonable to try and purchase a home two to three years after filing.

How do you go about doing it?

==> Verify Your Credit Report

Start by regularly checking your credit report. You’ll want to check your credit report about four times a year after bankruptcy to make sure everything gets settled correctly. The US government provides one credit report a year for free; the rest will cost around $15.

On your credit report, be on the lookout for items that should appear as settled in bankruptcy, but still show as owed, open or delinquent.

Contact the credit agencies and let them know of the mistakes. This is extremely, extremely common. Sometimes it’s just a lag in paperwork, but often times if you don’t take care of it, it’ll just linger there and hurt your credit.

Watch your credit report carefully for the years proceeding a bankruptcy. Make sure no new accounts pop up and that all old account are closed.

==> Start Building Credit Immediately

You have two tools available to you to build credit, even if you have no credit rating whatsoever: secured credit and installment loans.

Secured credit cards allow you to use cash collateral. You give the bank a small amount of cash, say $1,000, which they’ll hold as security against the loan. You’ll then have a credit card with a $1,000 limit which you can use to build your credit.

You can also get installment loans, such as a car loan. In this case, you’ll have to pay most of the loan in cash. For example, if you’re buying a $5,000 pre-owned vehicle, you might offer to pay $3,500 in cash and just take a loan for the $1,500. Most dealers will be willing to do this, even if you have no credit.

These two methods allow you to start rebuilding your credit right away.

==> Prepare Your Finances for the Purchase

In order to buy a home with a bankruptcy on your report, you’ll need a slightly higher than average down payment. Start saving up today and try to get 20% to 30% of your down payment ready by the time you want to buy.

Get a steady job and preferably have your spouse do the same. The higher the household income, the better your chances.

If you start rebuilding your credit right after bankruptcy, correct any errors on your credit report and start getting financially healthy again, there’s no reason why you can’t own a home in as little as two or three years.


Five Ways to Improve the Value of Your Home before Listing

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If you’re thinking about selling your house, you might want to wait. Taking just a month or two to improve the value of your home could help you tuck away thousands more later down the line.

Here are five simple and straightforward things you can do to improve the value of your home before listing.

==> Repaint

Repainting literally costs as little as a hundred dollars for paint and could make your home look brand new again.

There’s nothing that says age and lack of care quite like peeling paint. If the exterior or interior of your home doesn’t look freshly painted, that first impression alone could kill a potential deal.

So, head over to Home Depot with a few friends or the family and make a couple weekends out of it. One weekend on the exterior and one on the interior could be all it takes.

==> Lighting

The amount and type of light that your home gets can have a big impact on its perceived value.

Homes that are brightly lit with soft, diffused light seem the most homely and valuable. If you don’t have good lighting right now, invest a little bit of money on getting better fixtures.

==> Refinish Your Cabinets

Is the finish on your cabinets peeling or rubbing off? Applying a new layer of varnish or polyurethane can help give your whole kitchen that “new house” look.

Again, this is an extremely inexpensive method of making your home look brand new. It takes less than a day and can be done for under $100.

==> Curb Appeal

How does your home look from the front of the house?

Fix any visible blemishes at the front of the house. If you have a screen door that has holes in it, have the screen replaced. If the window sills have peeling paint, repaint the sills. If the wood in the staircase is chipping, lay a carpet over it.

Tidy up your garden. Trim the lawn, pull out the weeds and consider adding a few plants to spruce up the look.

==> Stage and Photograph the House

Finally, have a professional real estate stager work on your home.

Real estate staging is both an art and a science. It first involves deep cleaning your home. All the clutter will be removed and the tiles scrubbed clean. Then the home will be carefully and very subtly decorated.

Finally, a professional photographer is brought in to take photos that bring out the best in the house.

Your real estate agent should provide staging and photography services free of charge.

These five tips will help you give the impression that your home is brand new, even if you’ve lived in it for ten years. Small changes that cost less than $1,000 in total can easily help you increase the value of your home by $10,000, $20,000 or even more.


Five Questions to Ask Your Mortgage Broker

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If you’re considering a home loan, your most important job is to ask a lot of questions. It’s only natural that you won’t understand all the complexities of the deal in the beginning. You weren’t trained to. But, if you’re going to make the biggest financial transaction of your life, it’s essential that you do understand everything about it before you jump on board.

These are five of the most crucial questions to ask your mortgage broker.

==> Question #1: How Do You Get Paid?

Understanding whether or not your mortgage broker is incentivized to push certain kinds of loans is very important.

Some companies encourage their lenders to push loans that pay higher commissions than others, even if they’re not in the best interest of the client.

Asking this question will help give you a sense of whether or not your broker is really on your side.

==> Question #2: What Kind of Documents Do I Need?

The time to start preparing for your loan is now. Don’t wait until you’re up against a deadline to start gathering your documents.

Generally, you’ll need your pay stubs, your tax returns, your W-2 forms, your rental agreements, proof of expenses and anything else you need to verify your income and expenses.

==> Question #3: Which Loan Is Right for Me and Why?

Lenders have the option of giving you loans from an entire portfolio of different options. You should never just take a plain loan that wasn’t chosen specifically to cater to your situation.

Ask your lender what they’d recommend and why. If all they give you is “this is our best loan,” pick a different broker. Your broker should be able to give a good reason for why they chose that precise loan for you.

==> Question #4: What Are All the Costs?

There are all kinds of costs that go into getting a mortgage. Ask your broker up front what these are so you’re not surprised later.

Costs include title transfer, appraisal, escrow fees, taxes, inspections and more.

==> Question #5: Give Me the Details on Interest Rates

Ask for all the details regarding your interest rate.

If you’re getting a fixed interest rate loan, ask if you’re being charged a fee for locking the rate. Make sure to also ask if there’s a limited duration to the loan lock.

If you’re getting an adjustable rate mortgage, ask them to explain exactly how your rates might be adjusted. What index is used? How often can they raise your rates? Is there a maximum amount the interest rate can rise to?

Asking these questions will help you make an informed decision on your mortgage. If at any point you get the sense that your broker isn’t looking out for you, don’t be afraid to walk away. There are many others who want your business.


Can You Still Cash Out with a Reverse Mortgage?

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If you’re over 62 years of age and have significant equity in your current property, you may qualify for a reverse mortgage. Since the 2008 credit and mortgage crisis, many have been worried about getting reverse mortgages. Today, it’s once again a very viable option.

It’s true that in 2008, the credit markets contracted, meaning banks were much more hesitant about giving money out. Since a reverse mortgage is still a loan of sorts and add on the fact that lenders had no idea what real estate would sell for when it hit the market, the reverse mortgage market practically dried up.

Today, the story is very different. The real estate market is beginning to recover again. Lenders have a very good idea where the real estate market as a whole is going.

==> How Does a Reverse Mortgage Work?

Basically, a reverse mortgage is a loan for the value of your home, minus a certain amount for the lender’s security.

For example, let’s say you own a $500,000 home. It still has a $200,000 mortgage, so you have $300,000 in equity.

A reverse mortgage might let you take out a $400,000 loan on your $500,000 home, pay off your $200,000 mortgage and keep $200,000 for yourself.

This $200,000 becomes a line of credit for you to do whatever you want with. It’s like cashing out of your home, without having to actually sell your house.

==> What to Consider

Before getting a reverse mortgage, here are some of the most important things to consider.

First of all, do you want to leave the home to your kids or your spouse? Getting a reverse mortgage on your home is virtually the same thing as giving your home to the bank. If you want to pass your property on, it’s not a good option.

Next, consider how much equity you have in your house. Make sure that the amount you’d get from a reverse mortgage can both cover your mortgage and give you significant spending money.

The property has to be your primary residence. It’s also important that there are liens on the property and that you don’t owe any federal debt.

==> Getting a Reverse Mortgage

The great thing about a reverse mortgage is how easy it is to obtain.

You don’t need to prove income. In fact, you don’t even need income. Why? Because you’re “giving” the bank your home, in exchange for money now. The bank is receiving property as compensation, rather than repayment of a loan.

All the money you receive is tax free. You’re not earning money, you’re just taking out a loan, so you don’t have to pay Uncle Sam a dime.

Finally, you get to stay in the home until the loan term ends. Usually the terms of the loan will allow you to live out your life, so you never have to see your home go to someone else.

Today, the real estate and credit markets are solid enough that reverse mortgages are very much a reality. If you think you’re ready for one, schedule a talk with your lender to explore your options.