A better solution is a loan modification with your existing lender. This is when the terms of your existing mortgage are modified to produce a lower monthly payment. In essence, it is just like a refinance, but your credit and equity are not a major determining factor, like a refinance. In most cases, the interest rate is reduced and the term of the loan is re-amortized to a 30 year fixed rate. In some cases, the principal loan amount is even reduced to reach the target payment.
In some cases, simply asking your lender for a loan modification will work. But more often than not, you will need to hire a professional negotiator to work on your behalf. When you hire a professional, make sure you do not pay money up front, or if you do, it goes into an escrow account until the case is complete. If you do not get results, you should not have to pay for their services! Do your research and be careful not to get scammed. New laws are in place to protect homeowners, but criminals will always be there to steal your money if you let them.
When working with your lender, you will have to complete a loss mitigation package when requesting your loan modification. This will help them determine your qualifications. This is where a professional will come in handy, since getting turned down can be irreversible. It is important to submit a package that is complete and can be approved the first time around. You may be asked to provide proof of income, as you did when you obtained the original loan. Whether or not things have changed with your income is one of the things that the banks will look at.
If the value of your home has decreased and you are “upside down” in your loan, then you need to decide if keeping your home is even the best decision. As I said earlier, you may qualify for a loan modification with a principal reduction, but selling the home may be your best option. When you are upside down in your mortgage, a short sale can be an easy way out. A short sale is when the home is sold for less than the payoff amount and the lender forgives the difference.
Short sales can be tricky though, because your lender will not easily agree to this solution and may pursue a deficiency judgment after the home sells. It is very important to get your agreement in writing and to make sure they waive their right to pursue this deficiency judgment at a later date. We never recommend homeowners attempting a short sale on their own. Professional short sale negotiators or real estate agents specializing in this type of sale are available at little or no charge (to the homeowner), so take advantage and make sure your rights are protected.
Regardless of what you decide, it is important to know that you have options and letting the home go to foreclosure is never a good idea. Your credit will be ruined for years to come and buying a new home will be virtually impossible until you have recovered. Do not be afraid to ask for help or seek a professional to help you through these rough times.