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Help Available for Delinquent Loans

Loss of a job, unexpected medical bills, divorce, or other difficult circumstances can cause a homeowner to fall behind in his/her mortgage payments.  Many lending institutions are offering assistance and payment alternatives to delinquent homeowners.

Falling behind but not in default yet?  Look first for other available sources of funds.  This may include funds withdrawn from a retirement account or cash value taken from a life insurance policy.  Check with a tax adviser however, about the tax consequences of a retirement withdrawal and whether a hardship exception applies.  The Office of Housing and Urban Development (HUD) also has interest-free loans available to qualified homeowners to pay past due interest and escrows.

Try to work out a repayment plan with the lending institution.  Especially in these difficult economic times, lenders are open to working out a plan to pay any arrearage.  If the borrower can provide an explanation as to why the cause is a temporary one, the lender may be willing to spread the arrearage out over an extended time period to allow the borrower time to catch up.

Seek a mortgage modification.  The lender may be willing to voluntarily change the terms of the loan which may include a change in the interest rate, principal balance or time period for repayment.

Many homeowners may qualify for the recently enacted stimulus programs.  As details are provided, these programs should be investigated.

Consider a short sale.  A short sale involves the sale of a property for a sum which is not sufficient to pay the costs of closing and the outstanding loans against the property.  Lenders must approve the short sale which may take 20-40 business days, so a flexible buyer is essential.  Because a short sale does not generate sufficient funds to pay off the mortgage in full, there will remain a balance due under the note unless the lender agrees to discharge any balance due on the underlying debt, so that no balance remains due and owing after the short sale.

Finally, a homeowner in default on their mortgage may want to consider a deed in lieu of foreclosure.  In such instances the lender agrees to accept a deed transferring title to the lender to avoid the cost of a foreclosure sale.  Check with the lender to find out if they have any time restrictions on when they will accept a deed in lieu.  As with a short sale, the borrower would also want to make sure that the underlying debt is discharged as well.  If there is a second mortgage on the property, this would have to be addressed as well.

The worst course of action for a homeowners in default is to ignore the situation.  Given the newly enacted stimulus bills and the efforts of banks and the government to address the high default rate, many lenders have loss mitigation, or homeowners assistance departments to help such homeowners find the best solution for their individual circumstances.

Full post as published by New Jersey Law Blog on April 03, 2009 (boomark / email).