Let’s start this blog with a scenario. Please note that this is just a scenario and while there is no real Frank and Alice – there are many of you who may see a parallel to your own situation someone you know.
Frank is 45 and his wife Alicia is 42. They have two children who attend a local elementary school. The home that they are living in was purchased when the market was great and they were only required to put 10% down. That allowed them to purchase a bigger home in a better location in a school district where they could stay as the children grew up. Frank works for a small firm and Alicia has a home based business that is doing well. They owe $795,000 but since the market down turn, the home’s value plummeted to a dismal $587,000. Franks’ company has been adversely affected by the downturn in the economy and his hours have been shortened while his work load has increased. Because of their situation; they want to apply for a loan modification. They do not want to leave their home. They work for months on the extensive paperwork and obtain the needed approval.
Once they obtain the modification to their loan, their payments are cut in half. The note resets for 30 years. It doesn’t however take anything off the principle, so they still owe that $795,000. At the loan’s end, they will have paid almost double what they originally bought the home for.
What a frustrating situation to be in. Others in the neighborhood have sold and are now renting. Some owners wonder if really makes sense to keep paying monthly payments based on a value that does not reflect the current market value of the home. Yet Frank and Alice don’t want to have bad credit.
As the agent, I have had many clients in this situation. Do they stay and fight a losing battle or do they chose to do a short sale and cut their losses?
The first thing to do is consider the pros and cons of a short sale. These will be considered in the next two blogs.