At the time of the 2008-2009 real estate crash, as properties lost value, people found themselves owing more on their mortgage than the property was worth, and so even if they had the resources to continue making the monthly payments, they would often elect not to, because paying on a $200,000 loan for a house worth less than $200,000 made no financial sense. People would voluntarily stop making payments, in what is called a voluntary default.
These days, in the current relatively healthier economic climate, it’s more common that foreclosures result because people lose their job, develop medical problems that soak up their cash or get a divorce; those are by far most common instigators for foreclosure. In some instances, debtors lose tenants on a property they were using the rent to pay the mortgage, and that can sometimes spur a foreclosure. Most of the defaults these days are involuntary, meaning people’s financial circumstances have simply taken a hit and they can’t continue to make payments on the loan.
How Does a Loan Modification Work?
A loan modification is a voluntary agreement with the lender to modify the terms of a loan, to make it more affordable to the borrower. Common modifications can include reducing the effective interest rate; extending monthly payments over a longer period of time or a combination of the two. In some circumstances, particularly when the property is under water, meaning it’s worth less than what is owed, a loan modification can sometimes entail reduction of principal so that, for instance, a $200,000 loan secured by a $100,000 piece of real estate worth only $100,000 is reduced to $100,000, so that the borrower is now motivated to continue making payments.
Loan modifications typically take longer than you think, and they can be more difficult, because lenders are understandably reluctant to eat into their profit on the loan. The most common type of loan modification, in my experience, is a combination of a reduction in the interest rate and an extension of the payment period so that monthly payments reduce to a more affordable level.
Do Bankruptcy and Foreclosure Go Hand in Hand?
Typically, they only go hand-in-hand where there is significant equity in the property over and above the total amount owed and the debtor is trying to buy time to sell the property and salvage some equity. One of the problems of foreclosure is that the lender can retake the property regardless of whether there is equity in the property or not. It’s only through the foreclosure sale process that you hope the amount bid and paid by the purchaser is enough to permit the junior creditor (and the debtor?) to get the equity out of the property.
However, that seldom is the case, since most bidders at a foreclosure sale are looking for bargains and bidding as low as possible, so there is no guarantee that a foreclosure sale will result in a sale at anything near market value. Almost no foreclosure sale gets market value. If you have significant equity in the property and you want to sell it but you need time, that’s when a Chapter 7 or 13 might be a potential remedy for you.
Do Banks Automatically Know If I Have Faced Foreclosure Before?
Yes, because it’ll show up on your credit report as a default on your loan and the transfer of title is a public record. You will be able to own a home again after a period of time, if you otherwise maintain good credit and can put together enough money for a significant down payment; right now, that’s in the 10 percent range, although efforts are being undertaken to get things back to a position in where people can buy homes with a lower down payment requirement and in less time after a bankruptcy or foreclosure. The federal government is trying to get more people into home ownership. We hope that this effort on their part doesn’t recreate the same housing bubble that popped in 2008, but that remains to be seen.
For more information on Reasons For Foreclosure, a free initial consultation is your best next step. Get the information and legal answers you’re seeking by calling (916) 635-0302 today.