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What to do.  You are underwater on your Silicon Valley home (you owe more than it’s worth). Worse, you have a “pick a pay” loan and can only afford the lowest of the payment options. So your principal balance is growing each month, and you are sinking further into debt even after reading reviews of National Debt Relief while at the same time your home’s value is dissolving since homes in your price point haven’t yet figured out that we’re in recovery. It’s a double whammy and it’s terribly scary.

If you want to keep your house, you might try to get a loan modification, or “loan mod” from your bank. You can contact them directly or you can go to a nonprofit credit counseling agency for guidance.  (Just Google for one near you, there are plenty in the San Jose area.)

Many lenders aren’t doing this anymore, though, or at least not nearly as much as a couple of years ago.  Why is that? One reason is that the failure rate is so high.  Most people who are given a loan mod still end up in foreclosure – so all it does is delay the inevitable for most of them.  Additionally, it might be better for the banks, if they have insurance, to allow it to foreclose.  Remember, banking is a business and they are there to make money, not to help you out.  So normally they’ll do whatever best serves that end.

If your bank, credit union or whatever lending institution does consider granting you a loan mod, they will want to know that you are capable of repaying it.  So just as when you purchased they were looking at your debt to income ratio, they’ll be doing that again. For them, a loan mod is a bit like reselling a loan – and they don’t want to make (another) bad investment with you. So expect it to be conservative (in other words, tight criteria).

Let’s say you tried to get a loan mod on your Santa Clara County home but you don’t qualify. You feel like you’re drowning in debt.  What can you do?

At this point you are left with some uncomfortable choices and questions. If you want to keep your home, there are a few avenues to investigate.

  • see if you can rework your budget to apply more of your monthly income toward housing costs
  • consider renting a room out so you have additional funds to make the payment
  • would renting it out entirely make sense? If so, could you live more cheaply elsewhere?
  • is it possible to get a part time job, or another job?

This is a little like losing weight – with that it comes down to eating less and exercising more. With this financial mess, if you want to keep your house and are denied a loan mod it’s going to come down to making more money and spending less elsewhere so you can satisfy that payment.

At this point in many real estate agent’s post, you’d hear a sales job on how great short sales are. I’ve been through the training (lots) and I have a fair amount of experience with distressed property sales, but unfortunately I’ve seen the nasty underbelly of short sales. The success rate is just not that great (about half actually close), it’s an arduous process and in the end your credit IS hurt and you do lose your home. I can’t get really excited about that as an “alternative”.

To me, a short sale isn’t an alternative, it’s a last resort.

If it’s really going to be impossible to make that payment and without the short sale you are doomed to a foreclosure, then perhaps it is your best choice.  But there are so many pitfalls – things like potential tax consequences, debt collection agencies coming after you later for the “forgiven debt” and the length of time involved in most short sales that it’s hardly a happy solution.

Before anyone glibly talks you into attempting a short sale, go talk to a lawyer and a tax professional. I know, you’re broke. You don’t want to spend the money to see these professionals but if you don’t you are literally flying blind and don’t know what may come to haunt you down the road.  So just do it.  And don’t wait until a Notice of Default is filed – or it might be too late before you have any traction to do anything but lose the house.  Stay vigilant and don’t let the depression of the situation cause you to make poor choices that will simply worsen everything.

More upsetting to many is when they feel that the short sale is their best option – but they really don’t qualify.  (In truth, though, often if you don’t qualify, it isn’t really a last resort for you – it is a preference.)  Or they qualify but the short sale is a failure for one reason or another so the home never both sells and closes.  (A few times recently I’ve run into banks or credit unions demanding more than the home is worth. That makes it impossible to sell. Do they do this on purpose? I’m not sure they don’t, unfortunately.)

My hope, though, is that there’s another way – get a renter, get another job if you can, skip the meals out for the next year…find a way to save your home, with or without the bank’s help.

 

More reading on this topic:

Underwater & Considering a Short Sale or Loan Modification?

What’s the difference between short sales and foreclosures? What is an auction?