Cease Making Payments?

The State of Colorados Position Statement on Loan Modifications that was just revised and released to the general public indicates that some people are advising consumers to cease making mortgage payments even when are already delinquent on payments.

First realize if you want advise on this type of thing I recommend you talk to the government counselor first and then an attorney or accountant if you have one.

The Basic Options

Earn enough income, keep paying on your mortgage and eventually you will own your own home or sell it when you want hopefully for a profit and payoff the balance of the mortgage at the sale.  You are happy the bank is happy. 

If you don’t pay your loan or mortgage, then you are in default.  The bank will indicate this on your credit report and you will most likely not be able to get a home loan or a typical refinance for at least two years.  It is my understanding that this is the same effect on your credit as a Short Sale.   Where a Foreclosure will stay on for at least 7 years and a Bankruptcy for 10 years.  

I am no credit expert, but these are the things I hear consistently from the people who claim to be.

When People Ask Should I Pay?  I Say

When people have asked me what to do I tell them I cannot make that decision for them, but that there are some obvious options. 

If Current now, and you have the income, then Stay current on your mortgage and try to sell your home.  Save your credit.  If you need to short sale banks will consider a discount in some situations even if you haven’t had a late payment.  If you don’t qualify for a short sale due to other assets or earnings, you may have to bring money to closing or sometimes the Bank will agree to carry back the difference as an unsecured debt, that you repay over time (kind of a workout/sale combo).

If Current now but your income has ceased or shrunk to where you cannot make your payment.  You have three choices:

1. Borrow money elsewhere and make the payment planning to catchup with new lender later. 
2. Make a partial payment (what you can afford) and notify the lender of your inability to pay the full amount.    It is worth noting that a partial payment will sometimes be considered when the Bank is weighing whether or not to Foreclose.   It can also make the extra that needs scraped up later to stop the foreclosure from starting, smaller.   Be sure to note the month it is to be applied to (the one you are latest on).  NOTE - I believe a partial pay is the same as a late pay on your credit report.  BAD.
3. Make no payment to the bank and feed your family, pay your utility bills and keep trying to sell your house and/or find new sources of income.  NOTE - this will impact your credit very negatively for at least 2 years. 

How does a homeowner decide?

If the homeowner has no money to make the payment and they aren’t sure how to feed themselves or their kids and their home (in this market) is not worth what they owe on their mortgage.  Then I think they need to seriously consider if they should even try borrowing from a friend or family to make this payment.  They may need that avenue or last ”lifeline” call for funds later when they have lost the house.

In my opinion, no lawyer, mortgage broker, realtor, family member, counselor or anyone else can tell you what to do in this situation. 

You have to look into your soul.  Examine your morals.  Feel your faith about your future - Will it be better soon or will it be worse?   Can you visualize yourself on a path to financial recovery or not?

You must also think about where you will go.  An apartment usually requires at least 2 months rent to move in and with “Bad Credit” a late pay on your mortgage, they may require more and it may limit your options.  What is rent in your market?  Can you afford it?  How much reserve will you need to get back on your feet without getting evicted first. What is availability?   You need to know these things to figure out your plan and make your decision.  Moving is expensive, reconnection charges, change of addresses take time away from life and/or work.

I think if you have kids, then as a parent it is your responsiblity to try to do everything in your power to keep your kids off the street and if this means not paying the bank then don’t pay the bank.

I am a believer of positive thinking and attitude helping to steer your course.  However you can be overly optimistic.  If you just got fired from your high paying job and divorced in the same month or week and you think everything is going to be ok, you might be overly optimistic.  You might also be overly pessimistic.  Only you know your true capabilities, marketing abilities, desire, drive, etc. that will determine the correct path for you.

If you think realistically you will not have income for months, then just like in planning for a divorce or a bad economy or a disaster a person needs to watch out for themselves, have a reserve fund, know they can take care of their loved ones and consider what that is worth compared to their credit or even their home. 

A person also has to be able to look themselves in the mirror and sleep at night.  If the circumstances beyond your control are what is causing your problems, then I think you should be guiltless.  If it is something that you did on purpose or fraudulently then I think it will eat at you and screw up your karma. 

I seriously don’t believe that there are very many people out there (maybe a few) that intentionally buy a house and plan to lose it to the bank.  Lets face it.  It is always some type of circumstance that changes that affect income and ability to repay the loan.  To me, it doesn’t really matter who’s fault it is.  Because in reality,  if the homeowner doesn’t pay, the bank or investors lose.  The late-paying homeowner loses with a big sledge hammer ding on their credit report.  Should it go through to foreclosure they both lose even more.  The bank has a REO and foreclosed homeowner loses their home and is punished more by not being able to buy again for at least 7 years.    Plus the homeowner can either get forgiveness of debt phantom income or a deficiency judgement.

Is a SHORT SALE the Answer?

The short sale is one answer that is kind of a compromise, because it means:

The seller is going to lose their home and get nothing for it. 

They have typically already made the decision to stop making payments because of circumstances that have changed. But they know it is inevitable that they will sell for no profit or abandon their house eventually.  In this circumstance it seems to me, that the payments to the bank kind of don’t matter.  

At this point the homeowner should consider trying to get enough money scraped together to move into an apartment or in with a family or whatever, rather than trying to pay the Bank or lender any more money. 

Realize a short sale is a bit of a gamble though.  You have to find the buyer, you have to qualify with your lenders requirements, both in documentation, situation and in price based on their BPO and their ratios.

But the worst case of trying to do a short sale and failing is that the bank goes through with the foreclosure.  So if it fails, all it really costs is the time to put together the information and trying to sell your home (showings and yours or the realtor’s time.)