If you can no longer afford your mortgage due to a job loss or an interest rate hike, you can ask your lender about refinancing or a loan modification plan. A lack of equity, missed loan payments or a poor credit score could sink your chances of qualifying for either of these options. Fortunately, you still have a few alternatives, although each one presents you with both upsides and downsides.
If your bank won't play ball, you have to find a way to redress the balance between your income and your expenses. If keeping your home is your top priority, it's time to have a difficult discussion with your other creditors. You can explain your predicament to credit card companies and even your car loan finance company. If you can negotiate a settlement plan with these firms, you may free up enough cash to pay your mortgage. However, these entities are under no obligation to make such a deal. If they do agree to a deal, expect your credit score to drop as a result of failing to pay these debts in full.
You can save your home and get your finances back on track if you file Chapter 13 bankruptcy. In this arrangement, a court appoints a trustee to negotiate debt settlements with all of your creditors. The settlement period lasts for five years after which your finances should be back on track. Your lender can't foreclose on your home during this time frame as long as you have income and you continue to pay on the loan. On the downside, a bankruptcy remains on your credit report for seven years and causes your score to tank.
If you can't refinance or modify your loan due to negative equity, you could approach your lender about a short sale. In this arrangement, your lender allows you to sell the home for less than you owe. You can then rent a home that fits within your budget. Lenders don't like short sales, because they have to write off a portion of your debt. On the other hand, your lender may view a short sale as the lesser of two evils when compared with the cost of foreclosure. Like a bankruptcy, a short sale causes your credit score to nosedive. Not only that, but the Internal Revenue Service regard the debt write off as a cash gift from your lender. This means it's added to your income tax bill.
Deed in Lieu
If you have a small amount of equity in your home but can't find a willing buyer, you could ask your lender about a deed in lieu of foreclosure arrangement. This involves signing the deed for your home over to your lender. You lose the equity you have in your home, but you no longer have to deal with that costly mortgage payment. A lender may even allow you to sign over the deed if your loan is upside-down, in which case the debt write off is added to your income tax bill. Needless to say, lenders aren't always willing to agree to this arrangement but there's no harm in asking.
You can offload your mortgage and keep your credit score intact if you can find someone who is willing to assume your loan. You simply sign the deed over to the buyer and the buyer picks up where you left off in terms of paying your mortgage. Federal Housing Administration loans and VA mortgages, for instance, are assumable. A buyer who lacks the cash to make a down payment may go for this deal even if your loan exceeds the property's market value. However, the buyer must have good credit and enough income to cover the loan. Other than VA and FHA loans, most other mortgages are not assumable.
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