If your situation is permanent, you have more serious problems and choices. If your income has been reduced for the foreseeable future, you may still be able to modify your existing loan or refinance to bring your payments to a manageable level. If your income has been reduced to a point where there is no way you can make even reduced payments in the foreseeable future, you are facing foreclosure.
If you have substantial equity in your home, sell the property. You can probably get an equity line of credit to keep you going until you complete the sale. If you have a financially strong buyer who wants to assume your loan, ask the lender about it even if your loan states that it is not assumable. This workout assumption may be acceptable to your lender rather than having the loan repaid in full and your buyer seeking financing elsewhere. If you have little or no equity, approach your lender with one of two options.
1. The first is called a short sale. This is when the lender agrees to accept the proceeds of a sale even though it is less than you owe. This will work best if you have a buyer, but after all expenses of the sale, you will net somewhat less than you owe on the mortgage. The reason for this type of arrangement is that it costs the lender time and money to foreclose. If the loss on the short sale is comparable to the loss the lender will suffer through foreclosure, it makes sense to accept the short sale.
2. The second option is called a deed in lieu of foreclosure. The deed in lieu is a direct method of turning over ownership to the lender without the foreclosure process. Again, the lender saves the time and expense of foreclosure. When offering a deed in lieu, be sure that you have no obtainable equity. If a sale will net you some cash, the deed in lieu is not a good alternative.
A loan modification makes it easier to catch up on missed payments and keep the loan current in the future.
You may be thinking that if you have no equity, why bother with these remedies? Why not just stay in the home until you are evicted? Many people do. There are two reasons why you should not. First, it will ruin your credit. If there is any possible way to avoid foreclosure, the effort you make is worthwhile. A second reason is what is called a deficiency judgment. This means that if, after adding up what you owe on your loan - including the costs of the foreclosure - the sale does not fully reimburse the lender, you are personally responsible. If the home you used for collateral for the loan you took does not cover what you still owe, you are not just off the hook. The lender can go to court and get a judgment against you, and go after your wages and other assets.
Not all loans allow deficiency judgments. Some states do not allow them for the loan used to purchase your home, but do allow them for subsequent loans, such as the home improvement loan you got to put in the pool. One question you should always ask when applying for a mortgage loan is if it is a nonrecourse loan. A nonrecourse loan requires that the lender look only to the property for repayment. Regardless of the size of the loss the lender may suffer after foreclosure, it may not come after the borrower for reimbursement. In other words, deficiency judgments are not allowed.
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