Last Updated: October 1, 2010
Times are tough and many homeowners are faced with the possibility of foreclosure. Yes, the most recent bailout law is expected to help many homeowners stave off the threat of losing their home. But until that law becomes a reality, homeowners who face the possibility of foreclosure or who are behind on their payments should attempt to restructure their mortgage. FPA member Mark LaSpisa, CFP®, and principal of Vermillion Financial Advisors in South Barrington, Ill., offers this advice:
- Start by doing your homework. The Internet can be a great benefit.
- Learn what the current market rates are in your area.
- Know what the usual and customary closing costs are.
- Know if there are any penalties if the mortgage is paid off within a short period of time.
- Compare all rates based on annual percentage rate (APR), not current rate.
- Know what "rate lock" goes with your quote. This can make a big difference.
- Get your credit reports and credit scores from all three credit reporting agencies.
(Homeowners can get one free report per year from all three credit reporting agencies.)
- Call banks and find out their qualification for a refinance or restructure. Start with your current lender.
- Paying bills on time will increase possibility for a restructure.
- Increase income by taking on a part-time job.
- Stop using credit for a minimum of six months prior to applying for a restructure.
- Cut expenses wherever possible. (Cancel the cable television service or stop eating out, for instance.)
- Reduce debt if possible. (Sell the expensive car and switch into something you can afford.)
- Ask your current lender what their qualifications are for a "short sell" or if they would consider restructuring your current mortgage.
"To be sure, renegotiation is a privilege, not a right," said Randall S. Guttery, Ph.D., CLU, ChFC, professor of finance and real estate and CFP® program director at the University of North Texas in Denton, Texas. "They should not assume the lender will automatically restructure the loan."
In addition, Guttery noted that any debt relief may be a taxable event. "Debt relief of any sort historically is taxable as ordinary income," he said. So be sure to consult with a CPA or financial planner before renegotiating any mortgage or home equity loan.
What's more, Guttery cautions that restructuring a mortgage or home equity loan doesn't always have a happy ending. "Homeowners still need the income to support the restructure," he said noting that fully one-third of all restructured loans later default anyway. "Homeowners need to be realistic."