Cash Flow Issues: Is it Time for Mortgage Restructuring?
As a proud homeowner, any series of events that leave you on the cusp of mortgage foreclosure and eviction will be especially traumatic. For relief, you may negotiate a mortgage restructuring, or loan modification, while still in the pre-foreclosure stage to save your home as a distressed borrower.
A mortgage restructuring is a permanent change to the mortgage contract, with the intent of helping the borrower get current on payments and keep his home. For effective cash management, a mortgage restructuring should result in payments that are no more than 30% of your gross income.
The bank might agree to a lengthier term or even a lesser principal balance, when modifying the loan. You may have 20 years remaining to pay down $250,000 in loan principal on the original 30-year fixed mortgage. After mortgage restructuring, the bank may extend the loan maturity date by 15 additional years, while also writing down $50,000 off the principal balance.
The mortgage must fall into default before the bank entertains any mortgage restructuring proposals. The full mortgage payment is due on the first of the month, with a subsequent 15-day grace period before the bank tacks on late fees.
The mortgage falls into default and pre-foreclosure after 30 days of missed payments. In pre-foreclosure, the mortgage is in default, but has yet to be seized and auctioned off. The pre-foreclosure stage typically lasts for 150 days.
Take Financial Inventory
Take financial inventory and full accounting of your personal finances to back up your case for mortgage restructuring. This record should confirm that you have used up all available resources, in an attempt to stay current on mortgage payments. At this point, you would have already sold off taxable investments and burnt through cash reserves simply to stay afloat.
Research of comparable real estate will also prove helpful. Possibilities for mortgage restructuring improve, if your property value has significantly declined to the point where more money is owed upon the mortgage than the home is actually worth.
In pre-foreclosure, an aggressive investor might also emerge to put in a low-ball offer. For a short sale, the bank will accept a lower bid than the principal balance owed. Here, a distressed and motivated seller should price the home to sell – at a 10% discount to comparable real estate. A prospective buyer will likely demand a discount as compensation for the added risk of buying a home in need of costly repairs – due to your perceived lack of funds.
List the home for sale at the same time that you negotiate a mortgage restructuring. At this point, you would have lost the privilege of feeling attached to the property.
Financial Risks and Foreclosure Auction
The bank serves its own interests and is under no obligation to approve of any loan modification package. Mortgage restructuring programs were especially popular through the end of the 2008 Great Recession. Alarmingly, more than half of all loan modification agreements at that time still defaulted within six short months.
The lender will publish a notice of sale in the local newspaper, after 180 days of missed payments with no mortgage restructuring or home sale. The notice of sale schedules a time for your home to be auctioned off within the next 30 days. You will be subpoenaed with an eviction lawsuit and ordered to vacate the property immediately after the home foreclosure auction.