Short sale negotiation and loan modification are commonly heard terms within the real estate industry today. If you are facing foreclosure you are not alone. Thousands of people have lost their homes to foreclosure in the last year and thousands more will face financial hardship leading to foreclosure before things balance out.

The Foreclosure Epidemic

The foreclosure epidemic began with subprime mortgage lending which created what we call the mortgage melt-down. No one anticipated this; the mortgage industry is not entirely to blame. The adjustable rate mortgages (ARMs) and other creative financing methods were great deals for many people who could benefit from these programs. Many borrowers were able to get 100% financing at a very low rate, fixed for 3 years. Of course, they were aware that the rate could increase significantly when the time came for the ARM to reset, but they weren’t worried; they planned to refinance and get out of the ARM before that happened.

Unfortunately, the economy took a devastating downturn. With unemployment on the rise, many people lost their jobs and defaulted on their mortgage; therefore, they were unable to qualify to refinance their home. Now, they are stuck with a mortgage payment that they cannot afford. In addition, real estate market values declined sharply, making homes unable to appraise for anything near the amount owed on the mortgage; therefore, another roadblock to refinancing.

The Foreclosure Crisis

The devastation continues as people are walking away from their homes. Investors are taking a huge loss and mortgage guidelines are getting strict. Even people with very high credit scores are finding it difficult to get a new, fixed rate mortgage.

Bad things happen to good people! Foreclosure hurts, no matter what the cause. People facing foreclosure are devastated; many feel helpless, hopeless and depressed. They wonder who to turn to as they receive countless phone calls and letters from their mortgage company, demanding payment.

To add to the confusion, they receive letters from lawyers or other companies promising to “save your home from foreclosure” or “stop foreclosure now”. Some of these companies are somewhat reputable, but many are preying on your last dollar as they demand an up-front fee for a service that gives you false hope and ultimately does not provide a solution. Generally, a reputable company will not approach you, call you, or send letters to offer their services. This is the behavior of a predator that got your name from a foreclosure list that they subscribed to.

Foreclosure Solutions

Now that I have explained how we got into the foreclosure crisis, I will cover some of the options available to you. One is to just walk away. Though many people are doing this, it should be your last resort. A foreclosure is very damaging to your credit report and it is one of the items that take the longest time to be removed from your credit history. There are cases where this is your only option, but there are others to consider as well.

Some people are able to negotiate a mortgage modification plan with their lender to make their mortgage more affordable. The lender/servicer may agree to reduce the interest rate or extend the mortgage term. In some cases, lenders have been known to stop the foreclosure process and write off late fees, accrued interest, escrow shortages and even some of the principal. They might allow the borrower to “start over” with a whole new mortgage. Years ago, this was not common; however, things have changed drastically and so have lending practices.

Another solution is to list your home and see what kind of offers you get. Chances are you will not be able to sell the home for what you owe on the mortgage because market values have declined sharply. In this case, you need to negotiate with your lender to convince him/her to accept a short sale. A short sale is a transaction where the lender is willing to accept less than what is owed now rather than foreclose on the home, incur legal expenses, wait out the redemption period, evict the homeowner, secure the home, list the home, etc…All of this takes time and effort; meanwhile, values continue to decline and the mortgage holder takes a greater loss.

Homeowners can negotiate with their lenders to reach a solution; however, many do not know how to go about it, or they are just too stressed out and emotionally drained to handle the task. It is important that you know what to say and how to present your case so your lender will be willing to cooperate. There are reputable companies who provide these services for a reasonable fee.

Credits: David Smith is a Licensed Mortgage Loan Originator with over 30 years of Consumer Finance and Real Estate experience. His company, Mortgage Loan Audit Advantage is a wholly owned subsidiary of Umoveon Co, based in Plymouth, MI.