Q: I'm a married father of two who finds himself in a very ugly financial position, like a lot of my fellow Michiganders.
I'm out of work, unable to pay my mortgage, and starting to get notices from my primary lender and secondary (equity) lender. I am approaching three months of nonpayment on each of my mortgage loans.
I worked in the advertising industry that relied solely on the auto industry. In the last three years I have been the unfortunate victim of three mass layoffs, each with a different agency. The first layoff, which lasted four months, dented us financially. The second, which lasted eight months, wiped out all of our savings.
Now, we have nothing. My wife has just had her hours cut in half to part-time status, which no longer qualifies her for medical benefits. I have no earthly clue how to go about initiating a conversation with these lenders that won't put whatever I say in a bad light or be used against me legally.
I've sent letters of hardship to both lenders this summer with no response. We also have had our home for sale for almost a year now. I know a short sale is a definite possibility. Our Realtor is well versed in those. Someone had mentioned a "deed in lieu of foreclosure" as a possibility.
Also, we live on 7 acres. I did hear that some lenders would give you a year or so to live in the house before you are foreclosed upon. Should we really do that?
Staying in this home is not an option. We can barely make ends meet by just paying the necessities before our loan payments.
I guess I would like to know how to walk away from this house legally without having to pay hundreds of thousands of dollars down the road for selling the home at a price that's less than what's owed? Plus, how do I start negotiating with these lenders?
A: I'm so sorry that you and your family are caught in the crossroads of the economic downturn. With unemployment well into the double digits, Michigan has faced a prolonged recession that is unimaginable to most Americans.
Since you are more than 30 days late in paying your mortgage, you should call the HOPE NOW hotline (toll-free 888-995-HOPE) and have one of the housing counselors patch you in with someone at your lender's or loan servicer's office. They will see what, if anything, can be done to keep you in your house.
Since you're not presently employed, it's possible that you will not be able to have your loan modified. If not, then you might want to do a deed-in-lieu of foreclosure. While this would damage your credit further, your credit is already badly tarnished by your 90-plus days' late payments.
If you want to protect yourself down the line, make sure you and the bank agree that when you walk away from the deal you're done and that they can't come after you for any deficiency in the amount they received. If you move forward with a short sale, you will sell the home for less that what you owe the bank. When the lenders accept the short payment, they should agree that they will no longer hold you responsible for the balance that is owed on your loan. You'll need to make sure the first and second lenders both agree to this.
If you decide to go forward with a deed in lieu of foreclosure, you effectively hand over the keys and title to the home to the bank and, again, you need to make sure the lenders waive any claim against you for any money that might still be owed on the loan or loans to your home.
The second lender will have to agree (and will possibly get nothing out of the short sale or deed-in-lieu), and this may be a sticking point.
You may want to talk to an attorney (you can go to legal aid if you can't afford to talk to an attorney directly, or try the attorneys at TexasCCC.com, the consumer complaint agency that is staffed by attorneys and law students from the University of Houston Law School) to be sure that you're not setting yourself up for failure down the line. A key point: The home equity lender has to release the lien entirely and should release you from the obligation to repay the debt.
You can also file bankruptcy, which should discharge your debts. If you contact Consumer Credit Counseling Service of Greater Atlanta, you can speak with a bankruptcy counselor who can answer some of these questions.
I know that it feels like you're climbing a huge hill and you're probably exhausted from all of the financial troubles, but hang in there. You can take some positive steps to alleviate the situation and steer yourself toward the finish line.
Q: Should I refinance? I currently have 15 years left on my 30-year mortgage at 6.5 percent interest rate. The loan balance is $116,991.
A: Don't start shopping around for a refinance just yet. You're mostly paying off the balance of your loan. It would make sense to refinance only if you can get a 10-year loan at 4.5 percent (with very few fees). Then, you're saving five years of payments. (It could be four years of payments, but the savings should be significant).
For example: If you financed a loan amount of $117,000 at an interest rate of 4.5 percent over 15 years, the monthly payment would be $895.04. But if you financed a loan amount of $117,000 at 4.5 percent over a period of 10 years, the monthly payment would be $1,212.57.
If $1,212.57 is the same as what you're paying now or less, then you should refinance because you will save five years of payments.
You can play around with the numbers yourself at many online calculators. I calculated these at eloan.com. But you need to keep in mind that many lenders have raised their fees and costs to refinance. If the costs to refinance are too high or the rate you get isn't low enough, you may be better off with your current loan.