My husband and I are in our mid-50s and we own real estate, manage a moderate portfolio, have zero consumer debt, and own our cars. Our credit score had been in the high 700s all of our married life. We moved to California for work in 2005. My husband lost his job and we are in default on our "zero-down" house that has dropped in value by 50 percent. We are trying to work with the bank; but they do not respond. Our credit is ruined from this single set of horrific circumstances. We are facing foreclosure and need to know how to pick up the pieces, rebuild our credit and move on with our lives. Do you have any advice?
According to FPA member, Dalia Wood, CFP®, of Wood Planning, LLC, the loan may be held by a separate party from the company that sends your statements. If that is the case, you should have been notified. Learn more about foreclosure notifications at FTC.gov.
Wood also said that you should ask your servicer specifically who owns your loan. "If it was insured by the Federal Housing Administration (FHA), then you will have an easier time in your modification negotiations."
In addition, Wood noted that since you have a 'moderate' portfolio, your lenders will naturally expect you to use your savings to cover your obligations before they negotiate an agreement resulting in a loss on their behalf. "After all, the loan was not granted on the condition it only be repaid if real estate prices continued rising," she said. The U.S. Department of Housing and Urban Development (HUD) may be able to assist you in the modification process. Learn more at HUD.gov.
"If you decide that you do not want to use your other assets to maintain ownership of your current home then your credit report will reflect the default for seven years," Wood said. "In the past, most lenders still made new loans to buyers with this kind of history. However, going forward I believe that you will pay a serious penalty — the interest rates you will pay on loans will likely be two to three percent higher than average — should you want a new mortgage to purchase a home after defaulting on your current loan — for up to seven years. You should carefully weigh the impact of using your current portfolio to pay your current loan obligations versus the 'cost' — in higher interest rates in the future — should you choose to default on your current mortgage."
FPA member, Carol Somoano, CFP®, of Asset Planning, Inc., noted that if you cannot afford the home, pursuing a short sale or loan modification would be the best next step. "A short sale requires bank approval to sell the house for less than is owed," she said. "The short sale reflects better on your credit report than a foreclosure."
To succeed in getting approval for the short sale, however, it is vital that you get a real estate agent that does a large book of business of distressed sales. "Experienced short sale agents have relationships with the lenders and are more likely to have a successful outcome," Somoano said.
For loan modifications, Somoano recommends contacting Acorn.org. Acorn helps individuals obtain pro bono loan modifications.
If the loan modification does not work out and you have to sell, Somoano said the bright side is you will be able to rent a cheaper home and benefit from declining rents. "If you lower your monthly housing costs you will be able to build up your savings over the next few years and hopefully purchase a home that is affordable."