If you have been reading the papers lately, you’ve probably heard that banks have started avoiding foreclosures, and are electing to either help home-owners do loan modifications (refinances and lender workouts) or a short sale. Why is this? It is primarily driven by government pressure and large lawsuits that the major banks lost in 2012. The conclusion by the major finance institutions is that it has become more cost-effective and lower risk to pursue loan modifications and short sales.
There is a catch for home-owners considering approaching their bank for a loan mod or short sale….your request will not be considered simply because your house is “under-water”. In either scenario, the home-owner must prove a hardship to the lender. Hardships include: loss of employment, illness & medical, divorce or death, increase in mortgage payment and natural disasters. Hardships DO NOT include: loss of equity, wanting to resize, increased family size and excessive discretionary spending.
If you fall into the category of a hardship outlined above, then there is a good chance it makes sense to approach your bank. Loan modifications typically add to the length of your loan, reduce interest or provide you a defined time frame to get caught up. Rarely are principals reduced, however it does happen, so it never hurts to ask. If you have a hardship and want to stay in your home, requesting a loan mod should be your first strategy.
If a loan mod will not help you given your long-term goals and objectives, a short sale is an option to consider. A short sale essentially lets the owner with a hardship sell their home for less than the principal owed on all liens against the house. Note that banks have begun pursuing short sales in earnest, even reducing the time to close these transactions significantly. With that said, most still take 60+ days to close. It is important to understand that your credit will be negatively affected by a short sale, although not as significant as a foreclosure (3+ years depending on your current credit score).
Given the upward trending market in Cambrian (and many parts of N CA), it may make sense to stay in your home until appreciation provides equity. This should be the case if you can afford the current mortgage and see yourself living in the house for many years to come. If that is not the case, consider your choices outlined above and consult your bank ASAP. Don’t wait until you are in trouble and no longer able to meet your financial obligation. Best wishes whatever your choices!