Borrowing money for a home used to be simple
The lending bubble
A decade ago consumers were borrowing money without thinking. They stretched their finances for no real reason other than because they could. Lenders played along and gave out huge dollars without fully researching how the money would be repaid. It sent the lending world into a tailspin, and consumers struggled to repay loans. According to the National Association of Realtors, in 2007, 12% of all residential sales were for vacation homes and 21% were for investment properties. Many people took on too much debt and now buyers are under financial strains trying to manage it.
Managing too much real estate debt
For anyone who is strapped, there are options. Government-sponsored foreclosure programs are aimed at saving primary homes. Bankruptcy protection is on the rise. Here are some additional ways to manage.
• Refinance loans. Mortgage rates are historically low and all homeowners in trouble should at least consider a refinance. At minimum, a good refinance can cut down a mortgage payment by a few hundred dollars. Of course, some homeowners, whose home’s value has declined considerably, may not have a refinance option. According to Milo Benningfield, financial advisor in San Francisco, “Typically, lending companies won’t offer a refinance loan for more than 80% of a home’s value. That leaves owners who owe, say $200,000 on a condo now worth $170,000 without the ability to refinance.”
• The short-sale. There is also the short-sale option. When a home’s sale price is less than the mortgage total, owners can ask the lender to accept sale proceeds, even when they are less than the total owed. Normally, it’s easier to short-sell a primary home. Chicago attorney Joseph Nery said, “They are being more flexible when they think the only other option will be the customer forecloses on the property.” He also added, “A lender may also try to recoup their shortfall by looking to borrowers’ other assets like equity in additional properties, savings, and even retirement accounts.”
• Modification. The loan modification has grown in popularity in the last few years with President Obama’s push for aid to homeowners in trouble. Making a modification work relies heavily on the person borrowing money having the ability to prove their income is sufficient. The investor has the decision-making power to accept or reject the modification. Nery added, “More modifications are happening, but they involve a reduction of principal or interest rate charges, or other changes like lengthening the term of the loan to make payments more affordable.”
• Bankruptcy. Some consumers are seeking bankruptcy protection to save their homes. Areas like Las Vegas are seeing soaring numbers when it comes to bankruptcies. The market in Nevada is struggling, and according to a recent survey by RealtyTrack, over 60% of homes in the state are in default. Nery said, “Bankruptcy should be a last resort, but if someone reaches that point, they are no longer worried about their credit. They are in survival mode.”
Struggling with overwhelming debt
Borrowing money used to be a simple process. Lenders were quick to qualify consumers without thorough examinations of their finances. In today’s world, however, many people are struggling with that huge debt and looking for ways to manage. Though it is a difficult situation, there are ways to manage an overwhelming debt, but each one comes with its own problems to overcome.