Now that foreclosure moratoriums have expired in Michigan, many homeowners are still struggling to make ends meet and trying at the same time to keep their homes. For some, letting the family home go into foreclosure is not an easy choice to make, but it may seem like the best solution to obtain debt relief. If not done properly, however, it may create more problems later.
For Detroit-area homeowners, there may be more options available to them that will allow them to hold onto their home and restore their credit. It is wise to be informed on how federal and state law regulates procedures for foreclosures and loan modifications, as well as the best way to negotiate terms with lenders.
Seeking debt relief by going into foreclosure
Many people choose to just let their home go into foreclosure when they have little or negative equity in the home. When the market value of the home is less than the principal owed, homeowners with what is called an underwater mortgage will often decide to go into strategic default, in which they simply stop payments.
This may prove to be unwise, however. If the proceeds from the foreclosure are less than the outstanding balance of the mortgage, the lender may seek a deficiency judgement to recover the remaining debt. The foreclosure will also remain on the individual’s credit score for a long time, making it difficult for them to apply for a loan in the future.
Finding other ways to manage the mortgage
As foreclosures are costly to the lender, banks are usually open to negotiations if the mortgagee presents other options. One possibility is loan modification if the mortgagee can qualify. Unlike a refinance, with a mortgage loan modification, both sides negotiate to change the terms of the mortgage rather than replace them.
Some solutions that will provide relief to the mortgagee while allowing the relationship to continue include:
- Extending the terms of the loan
- Lowering the monthly principal payment
- Loan forbearance, in which the lender temporarily suspends payments
- Adding missed payments to the loan
- Going from an adjustable-rate to a fixed-rate mortgage
A loan modification will affect the homeowner’s credit score over the short term, but the restructuring of the mortgage allows them to rebuild their credit over time. They may even be able at some point to revert to the original terms of the mortgage.